1! 


UC-NRLF 


SB 


A    MANUAL 


OF 


CORPORATE  ORGANIZATION 

CONTAINING 

INFORMATION,    DIRECTIONS    AND    SUGGESTIONS 

RELATING    TO    THE    INCORPORATION 

OF    ENTERPRISES 


ENLARGED    EDITION 


BY 


THOMAS  CONYNGTON  OF  THE  NEW  YORK  BAR 

Author  of  "  A  Manual  of  Corporate  Management " 


NEW  YORK 

THE    RONALD    PRESS 
1908 


COPYRIGHT    1904 
BY 

THE  RONALD  PRESS  COMPANY 


COPYRIGHT   1908 
BY 

THE  RONALD  PRESS  COMPANY 


PREFACE. 


In  this  country  the  corporation  has  already  become  the 
favorite  form  of  business  organization.  Its  use  is  constantly 
extending.  Every  practicing  lawyer  is  at  times  called  upon 
to  incorporate  the  business  enterprises  of  his  clients  or  to 
counsel  them  in  regard  thereto.  The  present  work,  treating 
the  general  subject  of  incorporation  from  a  practical  stand- 
point, is  intended  as  a  convenient  manual  of  reference  for 
such  occasions. 

The  work  is  also  intended  to  point  as  clearly  as  may  be 
the  advantages  obtainable  under  the  corporate  form,  and 
to  suggest  the  ways  and  means  by  which  these  may  be  most 
effectually  secured  and  conserved. 

The  value  of  the  volume  will  probably  be  found  to  He 
largely  in  these  suggestions.  The  innumerable  conditions 
that  arise  in  the  differing  incorporations  cannot  all  be  spec- 
ifically covered.  The  methods,  instances  and  illustrations 
given  will,  however,  the  author  trusts,  cover  the  field  so 
broadly  that  even  though  particular  difficulties  are  not 
directly  met,  their  solutions  may  still  be  drawn  from  the 
suggestions  of  the  text. 

The  limits  of  space  have  prevented  an  exhaustive  treat- 
ment of  many  of  the  legal  points  discussed.  In  such  cases 
the  law  has  been  stated  generally. and  with  a  view  to  the 
avoidance  of  anything  questionable  or  hazardous.  Where 
necessary,  important  points  have  been  fortified  by  citation? 
and  quotations. 

iii 

240793 


PREFACE. 


The  -work"  has  been  prepared  for  use  in  any  part  of  the 
United  States  and  without  special  reference  to  the  laws  of 
any  particular  section,  though  the  author's  more  extended 
experience  with  the  corporation  laws  of  New  York  and  New 
Jersey  has  led  to  their  more  frequent  use  for  purposes  of 
illustration.  Wherever  the  book  is  used  it  will,  of  course, 
be  in  connection  with  the  local  statutes  applicable  to  the 
subject. 

The  forms  in  Part  VII  are  those  most  likely  to  be  useful 
and  suggestive  in  the  organization  of  corporations.  In  most 
cases  these  forms  are  taken  from  instruments  in  actual  use, 
names  and  local  details  only  being  changed. 

In  conclusion  the  author  would  state  that  this  volume 
is  intended  to  hold  the  same  relation  to  the  work  of  incor- 
poration that  his  preceding  volume  "  Corporate  Manage- 
ment "  bears  to  the  work  of  the  organized  company.  He 
can  only  hope  that  it  may  receive  from  his  professional 
brethren  the  same  appreciation  that  has  been  so  generously 
accorded  the  former  publication. 

THOMAS  CONYNGTON. 
New  York  City, 

December  i,  1904.. 

The  author  has  taken  advantage  of  the  present  reprint  of 
"  Corporate  Organization  "  to  make  such  changes  of  the  text 
as  were  necessary  to  bring  the  volume  up  to  date.  He  has 
also  added  a  number  of  forms,  without  which  the  volume  is 
incomplete  but  which  were  omitted  at  the  time  of  its  original 
publication  because  of  the  limits  of  available  space. 

THOMAS  CONYNGTON. 
New  York  City, 

March  i,  1908. 


TABLE   OF  CONTENTS. 


PART   I.— THE    CORPORATE   SYSTEM. 

Chapter  I. — Ends  Sought  by  Incorporation. 

§  i.  Desirable  Features  of  Corporate  Form. 

2.  Limited  Liability. 

3.  Legal  Entity  of  Corporation. 

4.  Permanence. 

5.  Stock  System. 

6.  Corporate  Mechanism. 

7.  Attractiveness  to  Investors. 

8.  Conclusions. 

Chapter  II.— Subscription  Lists  and  Contracts. 

§  9.  General. 

10.  Nature  of  the  Subscription  Contract. 

11.  Form  of  Subscription  Contract. 

12.  Underwriting  Agreements. 

Chapter  III.— Contracts  Prior  to  Incorporation. 

§  13.  Status  of  Corporation  upon  Organization. 

14.  Status  of  Contracting  Parties. 

15.  Agreements  between  Incorporators. 

16.  Promoters'  Contracts. 

17.  Option  Contracts. 

18.  Trustees'  Contracts. 

19.  Effect  of  Failure  to  Incorporate. 

Chapter  IV.— Where  to  Incorporate. 

§  20.  General. 

21.  Domestic  Incorporation. 

22.  Foreign  Incorporation. 

23.  Cheap  Incorporation. 

24.  Reputation  of  Different  States. 


Vi  TABLE  OF  CONTENTS. 

25.  Corporate  Laws  of  Different  States. 

26.  Liabilities  Imposed  in  Different  States. 

27.  Protection  of  Minority  in  Different  States. 

28.  General  Rules  for  Selection  of  State. 


Chapter  V.— Cost  of  Incorporation. 

§  29.  General. 

30.  Organization  Fees  and  Annual  Taxes. 

31.  Avoiding  Fees  and  Taxation. 

32.  Counsel  Fees. 

33.  Corporate  Equipment. 


PART   II.— STOCK   AND   STOCKHOLDERS. 
Chapter  VI.— The  Capitalization. 

34.  Basis  of  Capitalization. 

35.  Capitalization  at  Less  than  Real  Values. 

36.  Capitalization  at  Real  Values. 

37.  Capitalization  on  Earning  Capacity. 

38.  Capitalization  of  Good- Will. 

39.  Form  of  Capitalization. 

40.  Bond  Issues. 

41.  Financial  Exigencies. 

Chapter  VII.— The  Stock  System. 

42.  Capital  Stock. 

43.  Shares. 

44.  Certificates  of  Stock. 

45.  Unissued  Stock. 

46.  Issued  Stock. 

47.  Full-Paid  Stock. 

48.  Common  and  Preferred  Stock. 

49.  Other  Classifications. 

Chapter  VIII.— Preferred  Stock. 

50.  General. 

51.  Preference  as  to  Dividends. 

52.  Preference  as  to  Assets. 

53.  Cumulative  Dividends. 

54.  Participation  in  General  Dividends. 

55.  Redemption  Right. 

56.  Voting  Rights. 

57.  Convertible  Stock. 

58.  Founders'  Shares. 


. 


TABLE  OF  CONTENTS. 

Chapter  IX.— FulI=Paid  Stock. 

I  59-  General. 

60.  Watered  Stock. 

61.  Legal  Status  of  Watered  Stock. 

62.  Legal  Status  of  Full-Paid  Stock. 

63.  Certificates  for  Full-Paid  Stock. 

Chapter  X.— Treasury  Stock. 

I  64.  Definition. 

65.  Origin. 

66.  Transfers  to  Corporation. 

67.  Transfers  from  Corporation. 

68.  Legal  Status  of  Treasury  Stock. 

69.  Stock  of  other  Corporations  held  in  Treasury. 

Chapter  XI.— Status  of  Stockholders. 

!  7°-  General. 

71.  Functions. 

72.  Rights. 

73.  Powers. 

74.  Liabilities. 

75.  Relations  to  Directors. 

PART    III.— THE    CHARTER. 

Chapter  XII.— General  Considerations. 

76.  Nature  of  Charter. 

77.  Classification. 

78.  Business  Corporations. 

79.  Public  Utility  Corporations. 

80.  Financial  Corporations. 

81.  Charter  Details. 

82.  Application  for  Charter. 

Chapter  XIII.— Incorporators. 

83.  Who  may  Incorporate. 

84.  Number  of  Incorporators. 

85.  Functions  of  Incorporators. 

86.  Incorporators  as  Stockholders. 

87.  Dummy    Incorporators. 

Chapter  XIV.— The  Corporate  Name. 

88.  How  Secured. 

89.  Selection  of  Name. 

90.  Right  to  Corporate  Name. 

91.  Changing  the  Corporate  Name. 


TABLE  OF  CONTENTS. 

Chapter  XV. — The  Corporate  Purposes. 

§  92.  General. 

93.  Single  Purpose. 

94.  Comprehensive  Purposes. 

95.  Illegal  Purposes. 

96.  Things  "  Ultra  Vires." 

Chapter  XVI.— Stock  Clauses. 

§  97.  General. 

98.  Classifications. 

99.  Common  Stock. 

100.  Preferred  Stock. 

Chapter  XVII.— Location  and  Duration  of  Corporation. 

101.  Domestic  and  Foreign  Corporations. 

102.  Selection  of  State. 

103.  Principal  Office. 

104.  Duration. 

Chapter  XVIII.— The  Board  of  Directors. 

105.  Qualifications. 

106.  Number. 

107.  Authority. 

108.  Power  to  Pass  By-Laws. 

109.  Classification. 

i  TO.  Standing  Committees. 

Chapter  XIX.— Special  Provisions. 

in.  General. 

112.  Usual  Objects. 

113.  Cumulative  Voting. 

114.  Classification  of  Stock. 

115.  Corporate  Stockholding. 

116.  Limitations  on  Indebtedness. 

117.  Limitations  on  Salaries. 

118.  Sundry  Provisions. 

Chapter  XX.— Execution  and  Filing  of  Charter. 

§  119.  General. 

120.  Signing  and  Acknowledgment. 

121.  Filing. 

122.  Certified  Copies. 

Chapter  XXI.— Amendment  of  Charter. 

§  123.  General. 

124.  Subject  Matter. 

125.  Procedure. 


TABLE  OF  CONTENTS.  ix 

PART    IV.— THE    BY=LAWS. 
Chapter  XXII.— General  Considerations. 

§  126.  Function  of  By-Laws. 

127.  Subject  Matter. 

128.  Power  to  Make. 

129.  Arrangement. 

130.  Preparation. 

131.  Adoption  of  First  By-Laws. 

Chapter  XXIII.— Stock. 

§  132.  Preliminary. 

133.  Certificates  of  Stock. 

134.  Transfers  of  Stock. 

135.  Transfer  Agent  and  Registrar. 

136.  Stock  and  Transfer  Books. 

137.  Preferred  Stock. 

138.  Treasury  Stock. 

139.  Lost  Certificates. 

Chapter  XXIV.— Stockholders. 

§  140.  Annual  Meetings. 

141.  Special  Meetings. 

142.  Officers  of  Meetings. 

143.  Notice  of  Meetings. 

144.  Voting. 

145.  Certified  List  of  Stockholders. 

146.  Election  of  Directors. 

147.  Quorum. 

148.  Proxies. 

149.  Order  of  Business. 

Chapter  XXV.— Directors. 

§  150.  General   Considerations. 

151.  Number  and  Qualifications. 

152.  General  Powers. 

153.  Classification. 

154.  Vacancies. 

155.  Meetings. 

156.  Notice  of  Meetings. 
rS7-  Quorum. 

158.  Election  of  Officers. 

159.  Removal  of  Officers. 

160.  Compensation  of  Directors. 

161.  Power  to  Pass  By-Laws. 

162.  Order  of  Business 


TABLE  OF  CONTENTS. 

Chapter  XXVL— Standing  Committees. 


§  163.  Purpose. 

164.  Appointment. 

165.  Composition 

166.  Powers. 

167.  Procedure. 


Chapter  XXVII.— Officers. 


168.  Enumeration;  Qualifications 

169.  Presiding  Officers. 

170.  Secretary. 

171.  Treasurer. 

172.  Managing  Officers. 

173.  Counsel ;  Auditor. 

174.  Assistant  Officers. 

175.  Delegation  of  Official  Powers. 

176.  Salaries. 

177.  Removals;  Vacancies. 

Chapter  XXVIII.— Dividends  and  Finance. 

178.  General. 

179.  Dividends. 

180.  Reserve   Funds. 

181.  Limitations  of  Debt. 

182.  Bank  Deposits. 

Chapter  XXIX.— Sundry  Provisions. 

183.  General. 

184.  Corporate  Seal. 

185.  Penalties. 

186.  Amendments. 

PART  V.— ORGANIZATION  OF  CORPORATION. 

Chapter  XXX.— First  Meeting  of  Stockholders. 

187.  General. 

188.  Preparation  of  Minutes. 

189.  Method  of  Conducting  Meeting. 

190.  Opening  the  Meeting. 

191.  Reception  of  Charter. 

192.  Adoption  of  By-Laws. 


TABLE  OF  CONTENTS.  xi 


193.  Election  of  Directors. 

194.  Exchange  of  Stock  for  Property. 

195.  Other  Business. 


Chapter  XXXI.— First  Meeting  of  Directors. 

196.  General. 

197.  Minutes. 

198.  Opening  the  Meeting. 

199.  Election  of  Officers. 

200.  Adoption  of  Stock  Certificate. 

201.  Acceptance  of  Subscriptions. 

202.  Exchange  of  Stock  for  Property. 

203.  Financial  Provisions. 

204.  Other  Business. 


Chapter  XXXII.— Issuance  of  Stock  for  Property. 

205.  General. 

206.  Present  Doctrine. 

207.  Cases  in  Point. 

208.  Resume  of  Doctrine. 

209.  Property  that  may  be  Received. 

210.  Usual  Procedure. 

211.  Donation  of   Stock   to   Treasury. 


Chapter  XXXIII. — Concerning  Promoters. 

212.  The  Promoter's  Function. 

213.  Promoter's  Relation  to  Corporation. 

214.  Illegal  Arrangements. 

215.  Legitimate  Arrangements. 

216.  Incidental  Liabilities. 

217.  Restrictions  on  Sale  of  Stock. 


PART   VI.— SUNDRY    CONSIDERATIONS. 

Chapter  XXXIV.— Underwriting. 

218.  General. 

219.  Method. 

220.  Advantages. 


Xii  TABLE  OF  CONTENTS. 

Chapter  XXXV.— Voting  Trusts. 

§  221.  General. 

222.  Distinctions. 

223.  How  Formed. 

224.  Legal  Status. 

225.  Requisites. 

226.  Restriction  of  Stock  Sales. 

Chapter  XXXVI.— Protection  of  Minority. 

§  227.  General. 

228.  Rights  of  Minority  at  Common  Law. 

229.  Encroachment  on  Minority  Rights. 

230.  Protective  Measures. 

231.  Cumulative  Voting. 

232.  Classification  of  Stock. 

233.  Voting  Trusts. 

234.  Special  Arrangements. 

235.  Annual  Audits. 

236.  Charter  Limitations. 

Chapter  XXXVII.— Protecting  an  Inventor. 

§  237.  General. 

238.  Stock  Control. 

239.  Classification  of  Stock. 

240.  Voting  Trust. 

241.  Cumulative  Voting. 

242.  Specified  Majorities. 

243.  Limitation  of  Expenditures. 

244.  Assignment  of  Patent  to  Trustee. 

245.  Reservation  of  Royalties. 

Chapter  XXXVIII.— Incorporating  a  Partnership. 

§  246.  General. 

247.  Name. 

248.  Capitalization. 

249.  Exchange  of  Property  for  Stock. 

250.  Stock  Adjustments. 

251.  Board  of  Directors. 

252.  Maintenance  of  Agreed  Management. 

(a)  By  Voting  Trust 

(6)  By  Voting  Requirements. 

(c)  By  Classification  of  Stock. 

253.  Officers. 


TABLE  OF  CONTENTS.  Xl'ii 

Chapter  XXXIX.— Holding  Corporations. 


254.  General. 

255.  Statutory   Enactments. 

256.  Present  Status. 

257.  Limitations. 

258.  Parent  Companies. 


Chapter  XL. — Industrial  Combination. 


§  259.  General. 

260.  Preliminaries. 

261.  Option  Agreements. 

262.  Inspection  and  Appraisements. 

263.  Underwriting. 

264.  Organization. 


PART    VII.— FORMS    AND    PRECEDENTS. 

Chapter  XLL— Charter  Forms. 

Form. 

T.  Connecticut  Charter. 

2.  Delaware  Charter. 

3.  Maine  Charter. 

4.  South  Dakota  Charter. 

Chapter  XLIL— Special  Charters. 

Form. 

5.  New  York  Charter.     (Midvale  Realty.) 

6.  New  Jersey  Charter.     (United  States  Steel.) 

7.  New  Jersey  Charter.     (Chicago  Subway.) 

Chapter  XLIIL— By-Law  Forms. 

Form. 

8.  Simple  Form. 

9.  Extended  Form. 

10.  Comprehensive  Form. 

Chapter  XLIV.— Underwriting  Agreements. 

Form. 

11.  United  States  Shipbuilding  Company. 

12.  Globe  Telegraph  Company. 

Chapter  XLV.— Voting  Trust  Agreements. 

form* 

13.  Glen  Harbor  Improvement  Company. 

14.  Colorado  Western  Railroad  Company. 


Xl'v  TABLE  OF  CONTENTS. 

Chapter  XLVI.— Subscription  Lists  and  Contracts. 

Form. 

15.  Subscription  List. 

16.  Subscription  Blank.     Individual. 

.17.  Subscription  to  Bank  Stock.     Individual. 

18.  Letter  Accompanying  Subscription  Blank. 

19.  Subscription  List.     Trustee's. 

20.  Subscription  List.     Agreement  with  Promoters. 

21.  Subscription  List.     Preferred  Stock  with  Bonus. 

22.  Subscription  Agreement.     Payable  in  Stock. 

Chapter  XLVII.— Receipts  for  Stock  Subscriptions. 

Form. 

23.  Trustee's  Receipt. 

24.  Treasurer's  Receipt  for  Instalment  Payment. 

25.  Treasurer's  Receipt  for  Stock  Subscription. 

26.  Stock  Scrip. 

27.    Endorsement  Form  for  Stock  Scrip. 

28.  Assignment  of   Subscription  and   Payments. 

Chapter  XLVIII.— Stock  Certificates  and  Stock  Books. 

Form. 

29.  Stock   Certificate.     Common. 

30.  Stock  Certificate.     Preferred. 

31.  Voting  Trustees'  Certificate. 

32.  Assignment  of  Voting  Trustees'  Certificate. 

33.  Assignment  of  Stock  Certificate. 

34.  Stock  Transfer  Book. 

35.  Stock  Book  or  Stock  Ledger. 

Chapter  XLIX.— First  Meetings. 

Form. 

36.  Minutes.     Stockholders'. 

37.  Call  and  Waiver  of  Notice.     Stockholders'. 

38.  Proxy. 

39.  Inspectors'  Oath  and  Report. 

40.  Waiver  of  Notice  of  Assessment. 

41.  Minutes.     Directors'. 

42.  Call  and  Waiver.    Directors'. 

43.  Secretary's  Oath  of  Office. 

44.  Proposal  to  Exchange  Property  for  Stock. 

45.  Assignment   of  Subscriptions. 

Chapter  L.— Option  Agreements. 

Form. 

46.  Option  on  Capital  Stock. 

47.  Option  on  Business  and  Property. 

48.  Option  on  Real  Estate. 

49.  Option  on  Corporate  Plant  and  Business. 

50.  Corporate  Option.     Payment  in  Stock. 

51.  Assignment  of  Option. 


CORPORATE   ORGANIZATION. 


PART  J.-THE  CORPORATE  SYSTEM. 


CHAPTER    I. 
ENDS  SOUGHT   BY   INCORPORATION, 


§  i.  Desirable  Features  of  Corporate  Form. 

Practically  there  are  but  two  forms  of  business  combina- 
tion available  for  the  conduct  of  a  business  or  enterprise — 
partnership  and  the  corporation.  The  one  is  easily  entered 
into,  and  as  easily  dissolved,  the  other  is  formal  and  permanent. 
Men  may  drift  into  partnership;  the  law  frequently  im- 
plies it  for  them,  or  it  is  made  by  a  simple  verbal  agreement. 
Incorporation,  on  the  contrary,  may  be  had  only  by  deliberate 
purpose,  carried  into  effect  through  prescribed  forms  of  law. 
A  partnership  may,  and  frequently  does,  exist  without  the 
knowledge  of  the  partners;  an  incorporation  is  impossible  ex- 
cept with  the  formally  expressed  concurrence  and  participation 
of  all  the  interested  parties. 

The  general  and  steadily  increasing  preference  for  the  cor- 
poration over  the  partnership  as  a  form  of  business  organiza- 
tion is  due  to  the  very  material  advantages  offered  by  the 
former,  which  may  be  summarized  as  follows : 

(a)  Its  limitation  of  stockholders'  liabilities  to  a 
definite  amount. 

(b)  Its  distinct  legal  entity  for  all  business  pur- 
poses. 

15 


16  THE    CORPORATE    SYSTEM. 

(c)  The  stability  and  permanence  of  its  organiza- 
tion. 

(d)  The  representation  of  the  different  interests  in 
the  corporation  and  its  property  by  transferable  shares 
of  stock. 

(e)  The  management  of  the  business  by  an  elected 
board  of  directors,  acting  through  officers  and  agents. 

(/)  The  greater  ease  of  securing  capital  because  of 
the  safeguards  and  advantages  of  the  corporation. 

These  characteristic  features  of  the  corporate  form  are 
severally  considered  in  the  following  sections  of  the  present 
chapter. 

§  2.  Limited  Liability. 

The  subscriber  to  stock,  and  the  holder  of  stock  not  fully 
paid  for,  are  liable  to  the  corporation,  and,  indirectly,  to  its 
creditors,  up  to  the  par  value  of  their  stock.  In  most  states 
of  the  Union  a  subscription  involves  no  further  liability.  So 
soon  as  the  face  value  of  stock  is  paid,  this  liability  ceases  and 
the  stockholder  is  no  longer,  as  a  stockholder,  responsible  in 
any  way  for  the  corporation  and  its  doings.  In  Minnesota  in 
addition  to  the  regular  subscription  liability,  the  stockholder  is 
liable  in  case  the  corporation  becomes  insolvent,  for  a  further 
amount  equal  to  his  original  subscription — that  is  equal  to  the 
par  value  of  the  stock  he  holds.  This  double  liability  existed 
in  several  other  states  until  recently,  but  is  now  found  in  Min- 
nesota alone.  The  corporation  cannot  collect  this  additional 
amount  but  in  case  of  its  insolvency  any  creditor  of  the  cor- 
poration may  enforce  payment.  In  California,  each  stock- 
holder is  liable  for  his  unpaid  subscriptions,  and  in  case  of  in- 
solvency is  further  liable  for  such  proportionate  part  of  the 
corporate  indebtedness  as  his  stock  bears  to  the  total  capital- 
ization of  the  corporation.  Stockholders  in  national  banks, 
and  generally  stockholders  in  banks,  trust  companies  and  other 
moneyed  corporations,  are,  in  addition  to  any  subscription  lia- 
bility, held  liable  for  an  amount  equal  to  the  par  value  of  their 


ENDS  SOUGHT  BY  INCORPORATION.  17 

stock  in  case  of  the  insolvency  of  their  corporation.  In  some 
few  states  stockholders  may  be  held  for  any  debt  due  a  laborer, 
servant  or  other  employee  of  the  corporation. 

These  statutory  liabilities  are,  generally  speaking,  unfortu- 
nate, because  of  their  lack  of  uniformity  and  their  uncertain 
action.  Not  infrequently  they  work  serious  hardships  where 
stock  is  purchased  in  ignorance  of  their  existence.  They  are 
always  productive  of  litigation  and  the  states  in  which  they 
are  found  are  to  be  avoided  for  purposes  of  incorporation. 
(See  §26.) 

These  statutory  liabilities,  however,  exist  in  but  a  few 
states,  and  the  general  rule  prevails  that  a  stockholder  whose 
stock  has  once  been  paid  in  full  is  neither  liable  to  assessment 
by  the  corporation,  nor  to  action  by  its  creditors.  The  prop- 
erty of  the  corporation  in  which  he  is  interested  may  be  swept 
away,  but  his  liability  is  fixed  and  limited.  His  investment 
will  be  lost  but  that  is  the  worst  that  can  happen.  The  unlim- 
ited responsibility  of  the  partnership  does  not  exist. 


§  3.  Legal  Entity  of  Corporation. 

In  the  partnership  every  member  must  be  made  a  party  to 
all  actions  either  by  or  against  the  firm,  and  no  partner  may 
sue  or  be  sued  by  the  partnership.  He  cannot  contract  with  his 
firm,  nor  enforce  its  obligations  to  him.  The  great  inconven- 
ience of  this  is  manifest.  On  occasion  it  results  in  serious  loss 
and  injustice.  It  is  a  material  defect  of  the  system. 

The  corporation,  on  the  contrary,  is  a  distinct  legal  entity, 
entirely  apart  from  its  membership.  It  may  sue  and  be  sued 
under  the  corporate  name.  It  may  contract  freely  with  its 
stockholders  and  even,  under  proper  conditions,  with  its  officers 
and  directors.  It  may  bring  suit  to  enforce  these  contracts, 
and  in  its  turn  may  be  sued  by  stockholders,  officers  or  di- 
rectors. In  short,  for  all  purposes  of  ordinary  business,  the 
corporation  has  a  distinct,  individual  existence  of  its  own. 


18  THE  CORPORATE  SYSTEM. 

§  4.  Permanence. 

The  partnership  depends  for  its  continued  existence  upon 
the  continued  life,  sanity,  solvency  and  consent  of  each  one  of 
its  members.  It  is  always  readily,  and  often  unavoidably,  ter- 
minated, and  this  easy  and  at  times  undesirable  dissolution, 
with  its  possible  resulting  loss  of  business,  good-will  and  repu- 
tation, is  a  serious  defect  of  the  system. 

In  the  corporation,  permanence  and  stability  are  character- 
istic features.  The  organization  endures  until  terminated  ( i ) 
by  voluntary  dissolution,  which  must  usually,  though  not  in- 
variably, be  by  unanimous  consent  of  the  stockholders,  or,  (2) 
by  the  expiration  of  the  period  for  which  it  was  formed,  or, 
(3)  by  the  insolvency  of  the  corporation,  or  (4)  by  forfeiture 
of  charter  by  the  state.  These  are  the  only  legal  methods  by 
which  the  corporation  is  terminated.  The  lives,  the  mental  or 
financial  condition  of  its  stockholders,  the  antagonism  of  an 
individual  or  faction,  need  have  no  effect  on  its  existence. 
This  permanence  adds  materially  to  the  value  and  efficiency 
of  the  corporation  as  a  mechanism  for  the  transaction  of  busi- 
ness. 

In  some  few  states  the  maximum  term  for  which  charters 
are  granted  is  twenty  years.  In  others  it  is  fifty.  In  others 
there  is  no  limitation,  and  the  duration  of  the  corporation  may 
be  fixed  at  any  desired  period,  or  may  be  made — at  least  in 
name — perpetual. 

§  5.  Stock  System. 

In  a  partnership  there  is  no  satisfactory  or  generally  recog- 
nized method  of  expressing  and  representing  the  individual  in- 
terests of  the  partners.  Nor  is  there  any  way,  save  by  consent 
of  all  the  parties  interested,  by  which  a  partner  may  transfer  his 
interest  in  whole,  or  in  part  to  another  person.  Such  a  trans- 
fer, unless  by  general  agreement  and  adjustment,  dissolves  the 
firm. 

In  stock  corporations  the  exact  reverse  obtains.     Under  a 


ENDS  SOUGHT  BY  INCORPORATION.  19 

fixed  and  well-ordered  system,  the  various  interests  of  the  par- 
ties in  whom  the  ownership  of  the  corporate  property  rests  are 
expressed  as  equal  parts,  or  shares,  of  the  whole.  These  shares 
are  represented  by  quasi-negotiable  certificates  which  may  be 
transferred  as  desired,  with  but  little  formality  and  without 
affecting  the  operations  of  the  corporate  business.  The  con- 
venience and  the  obvious  business  advantages  of  this  method 
are  most  attractive  features  of  the  corporate  system. 

§  6.  Corporate  Mechanism. 

The  stable,  well-defined  and  orderly  system  of  administra- 
tion, characteristic  of  the  corporation,  is  an  admirable  and  im- 
portant feature.  The  election  of  a  board  of  directors  by  the 
stockholders  voting  according  to  their  stock  interests,  the  elec- 
tion of  officers  and  the  appointment  of  agents  by  this  board  for 
the  direct  conduct  of  the  business,  the  supervision  and  control 
of  these  officers  and  agents  by  the  board,  the  orderly  action 
of  the  board  as  a  body  at  meetings  called  in  accordance  with  by- 
law or  charter  requirements,  constitute  the  best  working 
mechanism  for  the  conduct  of  a  business  enterprise  that  has  yet 
been  devised. 

The  several  functions  of  the  stockholders,  directors  and  of- 
ficers, the  well-defined  laws  and  usages  governing  every  fea- 
ture of  corporate  operation,  the  records  to  be  kept,  the  reports 
to  be  made  and  the  protection  afforded  its  members,  combine 
to  make  a  system  compared  with  which  the  workings  of  the 
partnership  are  crude  and  inadequate. 

Like  the  federal  system  of  government,  the  corporate  or- 
ganization is  based  on  a  division  of  powers  and  duties  and  the 
operation  of  mutual  checks  and  balances.  If  well  arranged 
and  properly  conducted  its  operation  is  effective  and  satisfac- 
tory. It  must  be  observed,  however,  that  the  ideal  corporate 
organization  is  not  ordinarily  attained.  It  is  often  lost  through 
ignorance,  negligence  or  lack  of  experience.  Safeguards  and 
checks  may  be  omitted  or  purposely  set  aside  by  promoters 
and  exploiters.  A  charter  and  by-laws  well  adapted  for  one 


20  THE  CORPORATE    SYSTEM. 

corporation  are  often  stupidly  duplicated  for  another  of 
wholly  different  design  and  composition. 

To  avoid  these  errors  and  to  secure  an  effective  and 
smoothly  working  corporate  mechanism,  requires  skill  and 
intelligence  in  the  organization  of  the  corporation.  To  main- 
tain its  proper  operation  thereafter  demands  an  honest,  capable 
administration  or  watchful  care  on  the  part  of  those  interested. 

It  may  be  stated  in  passing  that  no  system  of  conducting 
business  has  been  or  can  be  devised  that  will  protect  the  inter- 
ests of  those  concerned,  automatically  and  without  effort  on 
their  part.  The  best  laws  are  of  no  effect  unless  enforced,  and 
the  most  effectual  and  well-devised  system  of  business  organi- 
zation may  be  wrested  to  evil  ends  unless  the  efforts  in  this 
direction  are  opposed.  All  that  can  or  should  be  done  is  to 
afford  the  weak  an  opportunity  to  protect  themselves  if  the 
need  arises.  If  they  will  not  avail  themselves  of  the  opportu- 
nity when  the  time  comes,  it  is  they  that  are  at  fault,  not  the 
system. 

§  7.  Attractiveness  to  Investors. 

Speaking  generally,  any  considerable  combination  of  capi- 
tal is  impossible  under  the  partnership  system.  No  matter 
what  the  merits  of  the  enterprise,  nor  how  great  the  induce- 
ments offered,  they  are  outweighed  by  the  dangerous  liabilities 
and  uncertain  operation  of  the  unincorporated  form.  For  this 
reason  any  appeal  to  the  investing  public  on  the  basis  of  a 
partnership,  or  of  a  joint  stock  association  is  foredoomed  to 
failure. 

On  the  other  hand,  the  corporate  form  has  been  found  most 
attractive  to  investors.  It  enables  them  to  invest  or  partici- 
pate to  a  definite  extent  without  rendering  themselves  indefi- 
nitely liable.  It  has  a  continued  period  of  duration,  usually 
lasting  until  insolvency  or  voluntary  liquidation.  The  busi- 
ness interest  obtained  may  be  sold,  transferred  or  transmitted 
to  posterity,  with  little  formality  and  without  material  expense. 
Its  mechanism  operates  in  well-defined  grooves  and  the  rights 


ENDS    SOUGHT    BY   INCORPORATION.  21 

and  liabilities  of  all  concerned  are  well  known.  It  has  its  own 
personality,  and  stockholders  are  not  involved  by  its  actions  or 
responsible  for  its  obligations. 

For  these  reasons,  if  it  is  desired  to  raise  capital  for  an  en- 
terprise, or  to  increase  the  amount  already  invested,  the  obvi- 
ous method,  and  the  one  almost  invariably  pursued,  is  to  incor- 
porate the  undertaking  and  sell  the  securities  of  the  com- 
pany so  formed. 

In  this  connection  it  may  be  observed  that  if  the  attractive- 
ness of  the  corporation  as  a  field  for  investment  is  to  be  pre- 
served, it  is  essential  that  those  features  shall  be  maintained 
which  serve  to  protect  the  interests  of  the  investor.  This  has 
not  been  the  case  in  many  recently  floated  incorporations.  Ex- 
orbitant and  even  fraudulent  prices  have  been  paid  for  proper- 
ties. Undue  power  and  emoluments  have  been  given  to  the 
original  promoters.  Rights  of  minority  stockholders  have 
been  denied,  and  the  smaller  investors  have  been  debarred  from 
any  knowledge  of  the  inner  corporate  operations. 

The  immediate  result  of  such  practices  has  been  to  divert 
much  investment  money  to  the  better  known  bonds  and  par- 
ticularly to  the  safe  haven  of  the  savings  bank,  where  returns 
are  small,  but  where  all  the  conditions  are  clearly  defined,  and 
where  both  principal  and  profits  are  secure. 

§  8.  Conclusions. 

From  the  preceding  considerations  it  seems  that  the  char- 
acteristic features  of  the  corporate  form  which  have  led  to  its 
extended  use  are :  ( i )  Its  efficiency  which  is  curtailed  only  by 
ignorance  or  lack  of  skill  in  its  organization;  (2)  its  con- 
venience which  is  inherent  in  the  corporate  system  and  requires 
no  special  attention;  (3)  its  safety  which  is  the  one  point 
above  all  others  that  requires  attention,  not  only  because  it  is 
the  one  most  apt  to  be  overlooked,  neglected  or  omitted  by 
intent,  but  because  it  is  the  most  important  feature  of  any 
business  enterprise  in  which  a  number  of  people  are  concerned. 

The  corporation  is,  from  its  nature,  a  democratic  institu- 


22  THE  CORPORATE    SYSTEM. 

tion,  and  the  safety  of  the  investors'  interests  should  be  a  first 
essential.  The  majority  must  rule,  but  the  rights  of  the  mi- 
nority demand  that  this  rule  be  fair,  open  and  honest.  Due 
adjustment  of  all  equities  should  be  made  so  that  all  interests 
are  represented,  none  favored  at  the  expense  of  others,  the 
general  business  facilitated  and  the  profits  fairly  apportioned. 
This  is  the  true  ideal  of  corporate  organization,  and,  speaking 
generally,  that  corporation  is  the  most  ably  organized  and  con- 
ducted which  most  nearly  approaches  this  ideal. 


CHAPTER  II. 
SUBSCRIPTION    LISTS    AND    CONTRACTS. 


§  g.  General. 

In  former  days  the  subscription  list  was  regarded  as  a 
necessary  preliminary  to  incorporation.  It  was  circulated 
either  to  determine  whether  sufficient  support  could  be  obtained 
to  justify  the  proposed  incorporation,  or,  if  this  were  already 
known,  to  commit  the  subscribers  definitely  before  the  organi- 
zation was  actually  undertaken. 

In  the  present  day  the  application  of  the  corporate  form 
has  been  extended  and  somewhat  modified,  and  the  attendant 
procedure  has  changed.  Now  the  corporation  is  usually  or- 
ganized first,  property  of  some  kind  is  taken  over,  and  stock 
is  then  sold  or  subscriptions  solicited  to  raise  any  needed  capi- 
tal. Under  this  plan  the  subscription  list  is  of  much  less  prom- 
inence and  importance  than  formerly. 

There  are,  however,  still  cases  of  incorporation  in  which 
the  preliminary  subscription  is  employed  and  is,  at  times, 
essential.  The  farmers  of  a  neighborhood  may  wish  to  estab- 
lish a  creamery,  or  a  fruit-evaporating  plant ;  in  some  growing 
town  the  citizens  may  wish  to  combine  their  efforts  for  the 
construction  of  an  electric  plant,  the  organization  of  a  bank, 
the  opening  of  a  library,  or  the  establishment  of  some  local 
industry.  In  such  event,  the  subscription  list  would  be  circu- 
lated as  the  first  step  toward  the  formation  of  the  contem- 
plated corporation.  (See  Forms,  Chapter  XLVL) 

Also  in  other  cases,  memoranda  or  agreements  are  entered 
into  between  the  parties  interested,  which  are  the  equivalent 
of  the  subscription  list  and  are  the  preliminary  and  definite 
steps  toward  the  intended  corporate  organization. 

23 


24  THE    CORPORATE   SYSTEM. 

§  io.  Nature  of  the  Subscription  Contract. 

Prior  to  the  organization  of  the  corporation,  the  ordinary 
subscription  is  merely  a  continuing  proposition  from  the  sub- 
scriber to  the  proposed  corporation  for  the  purchase  of  a  speci- 
fied amount  of  its  stock.  At  this  stage  the  subscription  is  not 
a  complete  and  enforceable  contract  because  the  other  party 
thereto — the  proposed  corporation — has  no  legal  existence, 
and,  until  the  corporation  is  formed,  the  death,  insanity  or  vol- 
untary withdrawal  of  the  subscriber  would  cancel  the  proposi- 
tion and  thereby  terminate  the  proposed  contract.  After  the 
corporation  is  organized  and  by  either  express  or  implied  ac- 
ceptance of  the  subscriptions  to  its  stock,  has  completed  the 
contract,  the  subscription  list  becomes  a  binding  agreement 
between  the  parties  thereto,  and  the  corporation  may,  if  neces- 
sary, bring  suit  for  specific  enforcement. 

To  avoid  this  possibility  of  revocation,  characteristic  of 
the  ordinary  subscription  list  before  acceptance  by  the  corpo- 
ration, subscriptions  are  frequently  made  payable  to  trustees, 
who  act  for  the  corporation  in  the  matter,  undertaking  its  or- 
ganization, and,  where  desirable,  the  collection  of  the  subscrip- 
tions in  whole  or  in  part.  Under  such  a  contract,  properly 
drawn,  the  subscriptions,  if  unconditional,  are  binding  as  soon 
as  made;  if  conditional,  as  soon  as  the  conditions  are  fulfilled. 

The  acceptance  of  a  subscription  by  the  corporation  not 
only  renders  the  contract  a  binding  one,  but  also,  of  itself,  con- 
stitutes the  subscriber  a  stockholder  of  the  corporation.  If 
his  subscription  is  made  to  a  trustee  for  the  corporation,  he 
becomes  a  stockholder  so  soon  thereafter  as  the  corporation  is 
organized  and  his  subscription  turned  in  by  the  trustee.  In 
either  case  nothing  further  is  necessary  to  legally  establish 
him  in  this  position,  nor  in  the  enjoyment  of  his  rights  as  a 
stockholder.  The  delivery  of  the  stock  certificates,  while  a 
formal  recognition  of  this  status,  confers  nothing  beyond  a 
convenient  evidence  of  his  stock  interest  that  he  did  not  have 
before.  Even  though  the  subscriber  never  paid  his  subscrip- 


SUBSCRIPTION    LISTS   AND    CONTRACTS.  25 

tion,  he  is  a  stockholder  from  the  time  of  the  acceptance  of  his 
subscription  until  such  time  as  by  proper  procedure  his  sub- 
scription is  canceled  or  forfeited  for  non-compliance  with  its 
conditions.  (Wheeler  vs.  Millar,  90  N.  Y.,  353,  1882.) 

It  is  to  be  noted  that  the  corporation  when  organized  is 
under  no  compulsion  to  accept  or  recognize  subscriptions  to 
its  stock.  The  subscriber  is  not  bound ;  neither  is  the  corpora- 
tion until  the  contract  is  completed  by  the  acceptance  of  the 
subscription  by  this  latter.  If  the  subscription  is  made  to  a 
trustee  for  the  corporation  and  is  accepted  by  him,  this  would 
make  a  binding  contract  between  the  subscriber  and  the  trus- 
tee, but  would  not  bind  the  corporation  until  acceptance,  ex- 
press or  implied,  by  this  latter.  If  the  corporation  accepted 
the  benefit  of  the  trustee's  acts  it  would  thereby  also  accept 
the  trustee's  contracts,  from  which  such  benefits  accrued.  The 
very  fact  of  the  organization  of  the  corporation  by  the  trustee, 
or  trustees,  might  be  held  to  be  an  acceptance  of  the  subscrip- 
tion contracts  which  rendered  such  incorporation  possible. 

Usually,  however,  the  acceptance  of  subscriptions  by  the 
corporation  does  not  enter  into  consideration,  such  acceptance 
following  its  organization  as  a  matter  of  course.  Litigation 
may  be  necessary  to  compel  payment  of  subscriptions,  but 
hardly  to  compel  their  acceptance  by  the  corporation. 

Subscriptions  made  as  a  part  of  a  prescribed  statutory  form 
of  incorporation  are  irrevocable  as  soon  as  made.  (Phoenix, 
etc.,  Co.  vs.  Badger,  67  N.  Y.,  294,  1876.) 

After  the  completion  of  any  subscription  agreement  by  the 
recognition  of  both  parties  thereto,  it  becomes  a  simple  con- 
tract and  subject  to  the  usual  laws  of  contracts. 

The  subscription  to  stock  must  be  distinguished  from  an 
agreement  to  purchase  stock.  In  the  first  instance  the  sub- 
scriber becomes  a  stockholder  immediately  upon  the  acceptance 
of  his  subscription  by  the  corporation.  In  the  latter  case  he 
does  not  become  a  stockholder  until  the  consummation  of  his 
agreement  and  the  delivery  to  him  of  his  certificates  of  stock. 
A  subscription  list  might  be  so  worded  as  to  be  merely  an 


26  THE    CORPORATE    SYSTEM. 

agreement  to  purchase  stock,  in  which  case,  the  subscribers 
would  not  be  stockholders  until  they  received  their  certificates 
of  stock.  (See  §  ii.) 

§  ii.  Form  of  Subscription  Contract. 

Generally,  the  form  of  the  subscription  list  is  of  small  im- 
portance if  the  intent  of  the  parties  is  clearly  expressed.  Ex- 
cept for  the  difficulty  of  proof,  a  verbal  subscription,  if  within 
the  provisions  of  the  statute  of  frauds,  would  be  binding  and 
entirely  sufficient. 

As  a  matter  of  ordinary  precaution,  however,  the  subscrip- 
tion list  should  be  prepared  with  due  regard  to  form  and  with 
a  clear  presentation  of  all  important  details.  The  name  of 
the  proposed  corporation,  its  general  purpose,  its  capitalization, 
the  par  value  of  shares,  the  state  in  which  it  is  to  be  incorpo- 
rated, and  the  conditions  under  which  the  subscription  is  made, 
all  should  be  set  forth  with  precision.  Enough  should  be  in- 
cluded to  prevent  any  question  as  to  the  nature  of  the  sub- 
scription and  the  conditions  under  which  it  was  made. 
(Woods  Motor  Vehicle  Co.  vs.  Brady,  181  N.  Y.,  1905.) 

Where  it  is  inconvenient  to  go  into  full  details  in  the  sub- 
scription list  proper,  a  general  statement,  or  prospectus,  is  fre- 
quently prepared  and  accompanies  the  list.  Where  this  is 
done  the  statements  of  this  prospectus  become  a  part  of  the 
representations  upon  which  the  subscriptions  are  secured,  and 
must  be  lived  up  to  in  all  essential  details  if  the  subscription  is 
to  be  held. 

Any  material  variation  from  the  statements  of  the  subscrip- 
tion list,  such  as  a  change  of  capital,  or  purposes,  or  location, 
would  release  the  subscribers.  For  this  reason,  only  those 
details  should  be  stated  explicitly  in  the  subscription  list  that 
have  been  fully  decided  upon;  any  undecided  points  being 
either  omitted,  or  stated  as  undecided,  or  otherwise  so  covered 
that  no  matter  how  finally  settled  the  subscriptions  previously 
secured  will  not  be  affected.  For  instance,  if  the  name  of  the 
proposed  corporation  has  not  been  finally  determined,  the  list 


SUBSCRIPTION    LISTS    AND    CONTRACTS.  27 

might  be  headed  with  any  suggested  name,  as  "  The  Smith 
Separator  Company,"  but  the  body  of  the  document  state  that 
the  subscriptions  were  made  to  the  stock  "  of  a  corporation  to 
be  organized  under  the  name  of  '  The  Smith  Separator  Com- 
pany/ or  such  other  name  as  may  be  later  determined."  Sub- 
scribers to  such  a  list  could  not  plead  any  voidance  of  their 
subscriptions  no  matter  what  name  was  eventually  selected. 
Or  if  the  capitalization  were  not  definitely  settled,  the  subscrip- 
tion list  might  fix  sufficiently  elastic  limits  by  the  use  of  such 
phrases  as  "  not  less  "  or  "  not  to  exceed  "  according  to  the 
conditions. 

At  times  individual  subscription  blanks  are  sent  out  instead 
of  a  single  list.  At  other  times  several  similar  lists  are  circu- 
lated as  a  matter  of  convenience.  If  properly  worded  to  show 
their  common  purpose,  these  separate  lists  will  for  all  legal 
purposes  be  held  as  a  single  list. 

The  subscription  list  should  be  clearly  and  unmistakably  a 
subscription  and  not  an  agreement  to  subscribe  in  the  future  or 
to  purchase  stock  later.  As  a  general  rule  the  courts  construe 
subscription  agreements  very  liberally  in  accordance  with  what 
appears  to  be  the  intent  of  the  parties,  but  a  direct  statement 
that  "  We,  the  undersigned,  hereby  agree  to  subscribe,  etc.," 
instead  of  the  proper  form,  "We,  the  undersigned,  hereby  sub- 
scribe, etc.,"  might  have  a  very  different  legal  effect  from  that 
intended.  (General  Electric  Co.  vs.  Wightman,  3  App.  Div., 
N.  Y.,  118  (1896)  ;  Yonkers  Gazette  Co.  vs.  Taylor,  30  App. 
Div.,  N.  Y.,  334  (1898) ;  Lake  Ontario  Shore  R.  R.  Co.  vs. 
Curtiss,  80  N.  Y.,  219,  1880.) 

It  is  to  be  noted  that  under  the  common  law,  unless  other- 
wise specified  in  the  agreement  of  subscription,  the  entire  capi- 
tal stock  of  the  proposed  corporation  must  be  subscribed  before 
any  of  the  subscriptions  are  binding  and  enforceable.  In  some 
of  the  states  this  has  been  modified  by  statute,  but  otherwise 
prevails,  and  where  it  is  desirable  that  subscriptions  for  a  less 
amount  than  the  entire  capital  stock  should  hold,  the  subscrip- 
tion list  should  so  specify.  It  is  competent  for  the  subscrip- 


38  THE    CORPORATE    SYSTEM. 

tion  list  to  fix  this  amount  at  any  desired  figure  and  the  sub- 
scriptions will  be  binding  provided  the  other  requisite  condi- 
tions are  fulfilled,  so  soon  as  the  specified  amount  is 
secured. 

Any  person  competent  to  contract  may  make  a  binding  sub- 
scription for  stock.  A  subscriber  for  stock  need  not  necessa- 
rily be  an  incorporator  of  the  company,  though  usually  an 
incorporator  must  be  a  subscriber  to  the  company's  stock.  One 
corporation  cannot  usually  subscribe  for  the  stock  of  another 
corporation,  though  it  might  be  permissible  in  the  case  of  a 
corporation  authorized  to  hold  the  stock  of  other  corpora- 
tions. 

§  12.  Underwriting  Agreements. 

In  the  organization  of  the  larger  corporations,  and  more 
especially  those  designed  to  effect  industrial  combinations,  it 
is  usually  very  important  and  at  times  absolutely  essential 
either  that  funds  be  raised  in  advance  of  the  time  when  the 
corporate  securities  can  be  offered  for  sale,  or  that  there  be 
some  positive  assurance  that  the  necessary  funds  will  be  de- 
rived from  the  sale  of  these  securities  when  they  are  ready  to 
be  offered.  Under  such  conditions  the  use  of  the  ordinary 
subscription  agreement  would,  at  the  best,  be  ineffective  and  in 
most  cases  absolutely  impracticable.  Under  such  circumstances 
recourse  is  had  to  the  modified  form  of  subscription  agree- 
ment known  as  the  underwriting  agreement.  (See  Chap. 
XXXIV,  Underwriting.) 


CHAPTER  III. 
CONTRACTS  PRIOR  TO  INCORPORATION. 


§  13.  Status  of  Corporation  upon  Organization. 

When  a  corporation  comes  into  existence,  it  is  usually  with- 
out debts,  contracts  or  obligations  of  any  kind,  save  those  ex- 
pressed in  its  charter  and  in  the  statute  law  of  the  state  of 
domicile.  It  is  not  bound  by  anything  done  or  said  before 
its  incorporation  unless  embodied  in  its  charter,  or  in  its  by- 
laws or  involved  in  the  procedure  of  its  organization.  A  cor- 
poration cannot  be  bound  before  it  exists  as  no  one  could  then 
act  with  authority  as  its  agent  or  representative. 

After  its  organization,  the  corporation  may  recognize  or 
accept  any  contracts  it  sees  fit,  and  this  applies  to  contracts 
made  on  its  account  before  its  incorporation.  Such  accept- 
ance may  be  express  or  implied.  If  the  corporation  takes  the 
benefit  of  such  a  contract  it  is  liable  thereon  without  any  ex- 
press recognition  or  formal  acceptance.  For  example,  if 
offices  had  been  leased  for  the  corporation  before  its  incorpora- 
tion, and  the  corporation,  when  organized,  occupied  the  offices 
it  would  be  liable  on  the  contract  without  further  acceptance. 
If  the  corporation  did  not  occupy  the  offices  but  by  a  proper 
resolution  recognized  the  contract  and  assumed  the  rent,  it 
would  be  liable.  If  it  neither  occupied  the  office  nor  assumed 
the  lease,  there  would  be  no  acceptance  either  express  or  im- 
plied and  the  corporation  could  not  be  held.  The  whole  mat- 
ter would  rest  in  the  discretion  of  the  corporation. 

§  14.  Status  of  Contracting  Parties. 

Contracts  are  continually  entered  into  by  incorporators, 
promoters  or  trustees  for  and  on  account  of  unorganized  cor- 

29 


30  THE    CORPORATE    SYSTEM. 

porations.  These  contracts  are  entered  into  on  behalf  of  the 
corporation  and  in  its  interests,  but  the  party  who  enters  into 
any  such  contract  is  himself  liable  in  the  absence  of  an  express 
agreement  to  the  contrary  until  the  assumption  of  the  contract 
by  the  corporation.  Then,  if  it  was  understood  that  he  was 
acting  in  the  interests  of  the  corporation,  the  party  directly  con- 
tracting is  relieved  of  liability,  the  corporation  taking  over  the 
liability  in  his  stead.  If,  however,  there  were  no  such  under- 
standing, the  party  who  originally  made  the  contract  would 
be  responsible,  unless  the  other  party  agreed  to  his  release,  even 
after  the  contract  was  taken  over  by  the  corporation. 

For  example,  take  the  case  of  offices  leased  for  the  use  of  a 
corporation.  If  leased  with  the  clear  understanding  that  the 
party  making  the  lease  was  acting  for  the  unorganized  corpo- 
ation,  such  party  would  be  personally  liable,  and  if  the  cor- 
poration failed  to  assume  the  lease,  could  be  held  for  the  full 
amount,  but  so  soon  as  the  contract  was  assumed  by  the  cor- 
poration would  be  released.  If,  however,  the  lease  were  taken 
without  a  clear  understanding  that  the  party  was  acting  for 
the  corporation,  he  would  not  be  relieved  when  the  corporation 
took  over  the  lease — untess  by  consent  of  the  lessor — but 
would  still  be  liable,  and,  should  the  corporation  fail  to  pay  its 
rent,  might  be  called  upon  to  make  good  the  deficiency. 

For  this  reason,  in  making  contracts  for  the  benefit  of  an 
unorganized  corporation,  the  fact  that  they  are  being  made  for 
such  proposed  corporation  should  be  clearly  recognized  and 
expressed.  The  parties  making  such  contract  should  also 
recognize  their  own  liability  in  the  matter,  and,  if  there  is  any 
uncertainty  as  to  the  ultimate  organization  of  the  corporation 
or  its  acceptance  of  the  contracts,  should  make  such  contracts 
dependent  upon  acceptance  by  the  corporation  or  else  be  pre- 
pared to  assume  the  responsibility  themselves. 

§  15.  Agreements  between  Incorporators. 

There  is  another  class  of  agreements  relating  to  the  unor- 
ganized corporation,  of  a  very  different  nature.  These  are  the 


CONTRACTS    PRIOR    TO    INCORPORATION.  31 

understandings  or  agreements  between  the  incorporators,  or 
other  interested  parties,  defining  the  nature  of  the  proposed 
corporation,  its  purposes  and  often  the  details  of  its  organiza- 
tion and  management.  Between  the  parties  these  agreements 
are  perfectly  proper  and  legitimate,  but  affect  the  corporation 
only  so  far  as  they  may  be  incorporated  in  its  charter  or 
by-laws. 

It  is  to  be  borne  in  mind  that  provisions  may  be  incor- 
porated in  the  charter,  or  made  part  of  the  by-laws,  in  pur- 
suance of  a  contract,  or  as  a  consideration  for  a  contract,  in 
such  wise  that  their  subsequent  alteration  or  repeal  can  be 
effected  only  by  consent  of  the  interested  parties.  One 
partner  may  agree  to  the  incorporation  of  the  partnership  busi- 
ness on  condition  that  certain  provisions  be  embodied  in  the 
by-laws,  the  maintenance  and  observance  of  such  provisions 
constituting  part  of  the  consideration  for  the  transfer  of  the 
partnership  property.  Such  by-law  provisions,  properly  in- 
corporated and  duly  adopted,  would  be  extremely  difficult  if 
not  impossible  of  revocation  without  the  consent  of  all  parties 
concerned.  (Kent  vs.  Quicksilver  M.  Co.,  78  N.  Y.,  159; 
Lowenthal  vs.  Rubber  etc.,  Co.,  52  N.  J.  Eq.,  440.) 

Formal  agreements  between  promoters  as  to  the  subject 
matter  of  a  charter  can  rarely  be  specifically  enforced,  and  the 
only  recourse  of  the  aggrieved  party  is  a  refusal  to  participate 
in  the  subsequent  organization  of  the  corporation,  or,  if 
damages  can  be  shown,  a  suit  against  the  offending  parties  for 
their  breach  of  contract. 

Often  agreements  in  regard  to  incorporation  are  mere 
verbal  understandings.  Usually,  if  not  carried  out,  these  only 
result  in  the  refusal  of  the  aggrieved  party  to  move  further  in 
the  matter,  such  agreements  not  ordinarily  furnishing  suf- 
ficient basis  for  litigation. 

§  1 6.  Promoters'  Contracts. 

The  general  doctrine  that  no  one  is  authorized  to  contract 
for  a  corporation  before  it  is  formed  applies  to  all  contracts 


32  THE    CORPORATE    SYSTEM. 

with  and  by  promoters.  The  promoter  is  himself  liable  on 
these  precorporate  contracts,  unless  otherwise  expressly  pro- 
vided, but  the  corporation  is  not. 

For  example,  as  is  frequently  the  case,  the  promoters  of  an 
enterprise  may  agree  with  an  attorney  for  its  incorporation, 
authorizing  him  to  attend  to  the  whole  matter,  including  dis- 
bursements, preparation  of  seal,  printing,  etc.,  the  amount  of  his 
professional  fee  being  agreed  upon  in  advance.  On  the 
organization  of  the  corporation,  its  directors  might  disclaim 
the  whole  matter  and  the  attorney  would  have  neither  re- 
course nor  claim  against  the  corporation  on  account  of  his 
contract  with  the  promoters.  The  corporation  having  utilized 
his  legal  services  in  its  incorporation  would  probably  be  held 
for  a  fair  fee,  though  this  is  not  certain,  and  for  the  necessary 
disbursements,  such  as  the  state  fee,  notarial  charges,  filing 
fees,  etc.  Such  claims  would,  however,  have  to  be  based  on 
their  own  merits,  not  on  the  terms  of  the  agreement  made  with 
the  promoters.  That  agreement  would  have  no  standing  as 
against  the  corporation,  and  should  this  latter  reject  the  seal, 
printing,  etc.,  the  attorney  would  have  no  ground  to  proceed 
against  the  corporation  therefor,  but  must  look  to  the  pro- 
moters. (Re  Empress  Engineering  Co.,  L.  R.  16,  Ch.  D.,  125, 
1881.) 

The  most  difficult  questions  arising  under  contracts  with 
promoters  relate  to  the  sale  of  property  to  the  corporation. 
It  is  a  matter  of  almost  daily  occurrence  for  promoters  to  dis- 
pose of  property  to  corporations  organized  by  them  for  the 
express  purpose  of  taking  over  such  property.  For  discus- 
sion of  this  somewhat  complicated  subject  see  Chapter 

XXXII,  Issuance    of    Stock    for    Property,    and    Chapter 

XXXIII,  Concerning  Promoters. 

§  17.  Option  Contracts. 

In  the  formation  of  corporations,  and,  especially,  in  the 
formation  of  combinations,  it  is  frequently  necessary  that 
options  be  secured  in  advance  of  the  actual  incorporation.  As 


CONTRACTS    PRIOR    TO    INCORPORATION.  33 

these  options  may  be — and  often  are — absolutely  essential  to 
the  enterprise,  they  must  be  secured1  before  the  corporation  is 
formed,  and  frequently  involve  very  considerable  expenditures 
of  money.  (See  Forms,  Chapter  XL.) 

Noth withstanding  the  importance  of  these  contracts  and 
their  peculiar  nature,  they  fall  under  the  general  rules  gov- 
erning precorporate  contracts.  If  accepted  they  become  the 
contract  of  the  corporation;  if  rejected  the  corporation  cannot 
be  held.  If  the  corporation  refused  to  take  over  any  such 
option  contracts,  the  party  obtaining  or  holding  same  would 
have  no  claim  for  compensation  or  for  damages  on  account  of 
any  payments  made  by  him  thereon  or  in  connection  therewith. 
He  might  have  some  claim  against  his  associates,  if  they  made 
any  promises  to  him  in  regard  to  the  options,  or  authorized 
him  to  procure  them,  but  the  corporation  would  not  be  in- 
volved, except  by  its  voluntary  consent. 

§  1 8.  Trustees'  Contracts. 

When  the  organization  of  a  corporation  is  contemplated, 
not  infrequently  a  trustee,  or  trustees,  will  be  selected  to  act 
for  the  inchoate  corporation.  Some  arrangement  of  the  kind 
is  necessary  where  subscriptions  to  the  stock  of  the  corporation 
are  to  be  made  binding  before  its  organization.  Also,  usually, 
it  is  advisable  to  have  definite  parties  in  charge  of  the  matter, 
who  have  power  to  act  for  the  subscribers  and  who  will  attend 
to  the  details  of  the  incorporation. 

Such  trustees  frequently  collect  payments  on  subscriptions, 
make  disbursements  in  the  interest  of  the  new  enterprise,  and, 
in  some  cases,  actually  carry  on  the  undertaking  until  such 
time  as  the  corporation  may  be  advantageously  organized  and 
put  in  control  of  the  going  concern. 

No  matter  how  far  such  trustees  may  have  carried  the  cor- 
porate affairs,  nor  to  what  extent  they  may  have  contracted 
in  the  interests  of  the  corporation,  they  have  the  same  in- 
dividual liability  on  these  contracts  and  the  same  inability  to 
force  them  on  the  corporation,  as  in  the  case  of  any  other  pre- 
corporate contracts. 


34  THE   CORPORATE   SYSTEM. 

The  coign  of  vantage  occupied  by  the  trustees  is  found 
in  the  fact  that  they  are  in  control  of  the  organization,  and, 
where  contracts  of  any  importance  have  been  entered  into  by 
them  on  behalf  of  the  corporation,  or  disbursements  made,  or 
obligations  entered  into,  they  will  see  that  these  are  properly 
assumed  by  the  corporation  before  its  control  passes  from  their 
hands.  Then,  if  these  contracts  have  been  entered  into  in 
proper  form,  so  that  the  assumption  by  the  corporation  re- 
leases the  trustees,  these  latter,  barring  fraud,  are  thereafter 
absolutely  free  from  any  liability  on  account  of  their  pre- 
corporate  undertakings. 

§  19.  Effect  of  Failure  to  Incorporate. 

When  contracts  are  entered  into  in  expectation  of  the 
formation  of  a  corporation  and  on  its  behalf,  their  status  if 
the  corporation  fails  of  incorporation  depends  upon  the 
nature  and  condition  of  the  contract.  A  subscription  to  its 
stock,  no  matter  how  irrevocable,  would  be  terminated,  and, 
if  payments  had  been  made  thereon  to  a  trustee,  any  unex- 
pended amount  might  be  reclaimed,  and,  if  the  trustee  were 
to  blame  for  the  failure  to  incorporate,  he  might  be  responsible 
for  the  portion  expended  as  well.  Most  other  contracts,  if 
clearly  made  on  behalf  of  the  proposed  corporation,  would  be 
terminated.  If  not  clearly  so  made,  the  parties  acting  for  the 
corporation  might  be  held  to  specific  performance,  or  for 
damages  for  non-performance.  If  the  contracts  were  made 
with  the  distinct  understanding  that  they  were  for  the  benefit 
of  the  proposed  corporation,  the  parties  acting  for  the  corpora- 
tion could  not  insist  on  performance  for  their  own  benefit, 
unless  with  the  consent  of  the  contracting  parties. 


CHAPTER  IV. 
WHERE   TO    INCORPORATE. 


§  20.  General. 

If  the  corporation  laws  and  imposts  were  uniform  in  every 
state  of  the  Union,  or  if  the  whole  matter  were  regulated  by 
general  Federal  laws,  the  best  location  for  any  particular 
corporation  would  be  easily  determined.  It  would  then,  as 
a  matter  of  course,  be  organized  in  that  state  in  which  the 
principal  operations  were  to  be  carried  on,  or  in  which 
its  headquarters  might  most  conveniently  be  located. 

There  is,  however,  great  variation  in  the  cost  of  incor- 
poration in  different  states,  also  in  the  rates  and  methods  of 
taxation  after  incorporation.  The  general  requirements  and 
regulations  imposed  on  corporate  operations  also  differ 
widely. 

Owing  to  the  material  differences  in  the  costs,  regulations 
and  requirements  of  the  several  state  laws,  taken  in  con- 
nection with  the  fact  that  a  corporation  organized  in  one 
state  may,  under  more  or  less  restriction,  or  lack  of  restric- 
tion, do  business  in  any  other  state,  the  selection  of  the  place 
for  incorporation  frequently  becomes  a  balancing  of  the 
comparative  advantages  and  disadvantages  of  the  available 
states.  The  low  taxes  of  one  state  will  be  weighed  against 
the  more  liberal  corporation  laws  of  another;  the  liabilities 
of  a  convenient  state  with  the  freedom  therefrom  of  another 
less  available;  the  benefit  of  incorporation  under  desirable 
laws  in  an  "  outside  "  state,  with  the  addition  of  the  burdens 
imposed  on  foreign  corporations  in  the  "  operating  "  state, 
as  against  direct  incorporation  in  this  latter;  or  the  priv- 
ileges allowed  by  one  state  as  against  the  immunities  en- 
joyed under  the  laws  of  another. 

35 


36  THE    CORPORATE    SYSTEM. 

§  21.  Domestic  Incorporation. 

Within  the  boundaries  of  the  state  by  which  it  was  char- 
tered, a  corporation  is  a  domestic  corporation — outside  these 
boundaries  it  is  a  foreign  corporation.  Within  its  own 
state,  a  corporation  has  certain  recognized  powers  and 
privileges  as  a  matter  of  right.  Outside  it  has  only  such 
powers  and  rights  as  may  be  accorded  foreign  corporations 
by  the  laws  or  customs  of  the  particular  state.  These  vary 
greatly  in  the  different  states.  In  some,  foreign  corporations 
are  discriminated  against,  while  in  others  upon  compliance 
with  the  prescribed  formalities  the  foreign  corporation  has 
the  same  status  as  the  domestic  corporation. 

As  a  rule  a  corporation  should  be  organized  in  that 
state  in  which  its  principal  operations  are  to  be  carried  on, 
and  this  rule  should  not  be  departed  from  unless  to  gain 
some  distinct  advantage.  At  times,  however,  there  will 
be  weighty  reasons  that  justify  the  selection  of  an  outside 
state  for  incorporation.  Also  it  often  happens  that  the 
business  of  a  corporation  must  of  necessity  be  conducted 
in  a  number  of  different  states.  In  any  such  case  it  is  domi- 
ciled in  one  of  these  states  and  thereafter  transacts  its  business 
in  the  others  as  a  foreign  corporation.  The  selection  of  the 
home  state  then  becomes  purely  a  question  of  expediency  and 
advantage.  (See.§ioi.) 

§  22.  Foreign  Incorporation. 

A  corporation  is  not  a  citizen  of  the  United  States  and 
has  no  claims  to  the  privileges  and  immunities  of  citizen- 
ship under  the  Constitution.  It  is  an  artificial  creation  of 
the  state  in  which  it  is  incorporated,  and  in  that  state  is 
endowed  by  common  and  statute  law  with  certain  rights, 
powers  and  immunities.  It  is  also  usually  allowed  to 
carry  on  its  operations  in  other  states  with  all  the  powers 
and  privileges  it  enjoys  in  its  home  state.  These  other 
states  may,  however,  if  they  so  desire,  ignore  the  fictitious 


WHERE    TO    INCORPORATE.  37 

personality  of  the  foreign  corporation,  refuse  it  recognition, 
debar  it  from  initiating  litigation  in  the  state  courts,  con- 
sider it  a  partnership  if  litigation  be  brought  against  it,  or 
even  entirely  prohibit  its  corporate  operations  within  the 
state,  except  in  so  far  as  they  may  be  permitted  by  the  con- 
stitutional provisions  regulating  interstate  commerce. 

Generally,  however,  no  such  discrimination  is  exer- 
cised against  the  foreign  corporation.  In  most  if  not  all 
the  states,  laws  will  be  found  providing  for  certain  fees  and 
requirements  as  a  pre-requisite  to  the  exercise  of  the  cor- 
porate rights  by  foreign  corporations  within  the  state,  but 
upon  compliance  with  these  demands  they  are  admitted 
freely  and  are  usually  accorded  all  the  rights  of  domestic 
corporations. 

Some  states  have  gone  even  further  than  this,  as  in  New 
York,  where  for  many  years  domestic  corporations  were 
subjected  to  high  fees,  burdensome  reports  and  possible 
liabilities,  which  were  not  imposed  upon  foreign  corpora- 
tions doing  business  within  the  state.  As  a  consequence 
the  citizens  of  New  York  when  desirous  of  incorporating 
a  local  business  or  enterprise  would  resort  to  other  states 
for  the  purpose.  Thereafter  the  corporation  so  organized 
did  business  in  New  York  as  a  foreign  corporation  and  this 
though  all  the  parties  interested  resided  in  the  state  and  all 
the  corporate  business  was  transacted  there. 

This  practice  gave  rise  to  litigation  to  determine  the 
right  of  citizens  to  incorporate  elsewhere  when  the  cor- 
porate business  was  to  be  conducted  in  the  state,  but  the 
decisions  were  uniformly  and  unreservedly  in  favor  of  such 
right.  (Merrick  vs.  Santvord,  34  N.  Y.,  206  (1866); 
Demarest  vs.  Flack,  128  N.  Y.,  205,  1891.)  In  other  states 
the  same  question  has  arisen  and  has  been  so  uniformly  decided 
in  the  same  way  that  the  principle  may  be  regarded  as  firmly 
established. 

In  some  states  conditions  exist  of  so  onerous  a  nature  as 
to  render  foreign  incorporations  most  desirable,  as,  for 


38  THE  CORPORATE    SYSTEM. 

instance,  the  double  liability  of  Minnesota,  imposed  upon  the 
stockholders  of  certain  corporations  when  organized  under  the 
laws  of  the  state.  Under  ordinary  conditions  the  stockholders 
of  a  foreign  corporation  doing  business  in  the  state  escape 
this  double  liability  altogether,  being  subject  only  to  such 
liabilities  as  were  imposed  by  the  corporation  laws  of  the 
state  of  organization. 

In  this  connection  it  is  to  be  noted  that  the  State  of 
California,  in  which  a  special  liability  is  imposed  upon 
stockholders  of  domestic  corporations,  sought  to  extend 
this  same  liability  by  statute  provision  to  the  stockholders 
of  foreign  corporations  doing  business  within  the  state. 
This  liability  was  sustained  by  a  decision  of  the  Supreme 
Court  of  the  United  States  as  against  the  California  stock- 
holders of  a  Colorado  corporation  doing  business  in  Cali- 
fornia. (Pinney  vs.  Nelson,  183  U.  S.,  144,  1901.)  In  this 
case,  however,  the  corporation  was  organized  in  Colorado, 
mainly  by  citizens  of  California,  for  the  express  purpose 
of  doing  business  in  this  latter  state,  and  this  purpose,  with 
unusual  and  perhaps  unnecessary  frankness,  was  specifically 
set  forth  in  the  charter.  Without  such  charter  statement,  or 
in  the  case  of  an  ordinary  foreign  corporation  doing  business 
in  California,  it  is  doubtful  if  the  statute  liability  would  be 
sustained  even  against  California  stockholders  though  the 
matter  has  not  yet  been  adjudicated. 

It  may  be  stated  as  a  general  rule  that  if  corporate  busi- 
ness of  any  importance  is  to  be  carried  on  in  a  foreign 
state  all  the  requirements  of  that  state  in  regard  to  foreign 
corporations  should  be  complied  with  as  a  matter  of  business 
policy  and  expediency.  If  they  are  not  so  complied  with, 
the  usual  penalty  is  the  refusal  of  corporate  recognition  by 
the  foreign  state.  The  corporation  may  then  still  carry  on 
business  within  such  foreign  state,  its  property  is  safe  from 
confiscation  and  it  cannot  be  prevented  from  bringing  suit 
in  all  proper  cases  in  the  United  States'  courts  in  that  state. 
Beyond  this,  however,  it  has  no  status.  It  cannot  enforce  a 


WHERE    TO    INCORPORATE.  39 

contract  or  collect  a  debt  in  the  state  courts.  If  sued,  it 
will  be  treated  as  a  partnership  and  its  stockholders  con- 
sidered as  partners. 

§  23.  Cheap  Incorporation. 

Resort  to  outside  corporation  on  account  of  its  cheap- 
ness is  legitimate  but  not  always  wise.  The  cheap  states 
have  their  advantages,  but  the  excellence  of  their  corporate 
regulations  does  not  figure  among  these.  Nor  is  the  status 
of  their  incorporations  as  a  class  so  far  removed  from 
reproach  as  to  render  the  association  entirely  desirable  for 
reputable  organizations. 

Occasions  will  occur  when  temporary  or  experimental 
incorporations  are  desirable,  or  where  the  conditions  are 
such  that  the  cheapest  incorporation  must  be  made  to  serve, 
or  where  the  laxity  of  corporate  regulation  is  regarded  as 
advantageous.  Then  the  cheap  localities  will  be  sought. 

Speaking  generally,  however,  the  ease  and  cheapness 
with  which  incorporation  may  be  secured  in  these  localities 
draws  to  them  most  of  the  unsubstantial  enterprises,  illusive 
undertakings  and  fraudulent  schemes  that  adopt  the  cor- 
porate guise  for  their  dubious  careers.  These  give  char- 
acter to  the  incorporations  of  these  localities,  and  the  very 
fact  that  a  corporation  is  organized  in  a  cheap  state  is  in 
itself  a  circumstance  requiring  explanation  and  tending  to 
discourage  the  experienced  investor.  In  other  words  the 
corporation  is  in  bad  company  and  is  likely  to  suffer  the 
usual  results  of  such  association. 

An  even  more  material  objection  to  the  states  of  cheap 
incorporation  is  found  in  the  fact  that  their  corporation 
laws  are  crude,  incomplete,  and,  for  the  most  part,  unad- 
judicated.  Nor  is  there  any  reasonable  assurance  of  the 
permanency  of  the  existing  laws.  Obviously  they  have  been 
compiled  hastily,  and  without  requisite  care  and  considera- 
tion, and  they  are  liable  to  be  amended  or  altered  at  any 
time  with  equal  haste  and  lack  of  judgment.  The  pos- 


40  THE    CORPORATE    SYSTEM. 

sibilities  in  this  direction  are  illustrated  by  the  corporate 
career  of  West  Virginia.  Up  to  1901,  West  Virginia  had 
a  virtual  monopoly  of  the  cheap  incorporation  business, 
and  derived  therefrom  a  large  and  very  profitable  revenue. 
In  the  year  mentioned,  without  previous  warning,  and  with- 
out obvious  reason  beyond  an  ill-judged  avarice,  the  state 
legislature  raised  the  corporate  fees  and  taxes  materially, 
making  them  complicated  and  burdensome.  The  result 
was  the  practical  destruction  of  the  incorporating  business 
in  West  Virginia.  Most  of  the  outside  corporations  already 
in  the  state  re-incorporated  elsewhere,  new  incorporations 
ceased  to  come,  and  West  Virginia  is  no  longer  considered 
an  available  resort  for  incorporators  from  other  states. 

§  24.  Reputation  of  Different  States. 

Each  of  the  incorporating  states  has  a  general  reputation 
in  corporate  matters,  primarily  arising  from  the  character  and 
operation  of  its  corporate  legislation  and  from  the  security 
afforded  thereby  to  corporate  investors  and  creditors,  but 
actually  derived  from  the  character  of  the  corporations  organ- 
ized under  its  laws. 

This  reputation  is  of  much  importance  to  corporations  in- 
tending to  offer  their  securities  to  intelligent  investors.  In  the 
cheaper  localities,  on  account  of  this  cheapness  and  the  accom- 
panying laxity  of  the  corporate  laws,  such  reputation  is  dis- 
tinctly bad.  The  mere  fact  that  a  corporation  is  organized  in 
Arizona  or  South  Dakota  is  sufficient  to  put  experienced  in- 
vestors on  their  guard  and  renders  the  sale  of  corporate 
securities  difficult. 

Prior  to  the  amendments  of  February  4,  1905,  the  laws  of 
the  District  of  Columbia  regulating  incorporations  were  cul- 
pably slack.  Fees  were  nominal;  restrictions  were  practically 
nil,  and  as  a  result  the  incorporations  of  the  District  became  a 
national  scandal.  Attention  was  called  by  President  Roosevelt 
to  the  abuses  that  had  grown  up  under  these  laws  and  Con- 
gress was  asked  to  abate  the  evil.  This  was  accomplished  by 


WHERE    TO    INCORPORATE.  41 

a  few  drastic  changes,  and  the  corporate  code  of  the  District  is 
now  at  least  indifferently  good.  Its  laws  are,  however,  avail- 
able only  for  local  incorporations  and  it  is  to  be  regretted  that 
while  a  revision  was  under  way  it  was  not  carried  further. 
A  model  code  in  the  District  of  Columbia  with  the  fees,  taxes, 
records  and  reports  of  an  ideal  system  would  not  only  have 
served  for  local  incorporations  but  could  have  been  made 
available  and  advantageous  as  well  for  corporations  conduct- 
ing an  interstate  business  or  carrying  on  operations  in  different 
states.  It  would  also  have  served  as  a  model  for  the  country 
at  large,  and,  if  its  operations  were  satisfactory,  would  un- 
doubtedly have  furthered  materially  a  much  to  be  desired  uni- 
formity of  corporate  laws  in  the  various  states  of  the  Union. 

Among  the  more  moderate-priced  incorporating  states 
Maine  stands  well  and  is  resorted  to  by  many  Eastern  corpo- 
rations. Delaware  has  a  fair  reputation  and,  having  recently 
( 1907)  made  very  considerable  reductions  in  both  organization 
fees  and  annual  taxes,  should  become  one  of  the  most  popular 
states  for  outside  incorporation.  Connecticut's  reputation 
where  known  is  good. 

New  Jersey  is  the  most  popular  state  of  the  Union  for  out- 
side incorporations  of  large  capitalization,  and  its  reputation 
is  excellent.  Massachusetts  stands  high,  on  account  of  the 
conservatism  of  her  laws,  while  Pennsylvania,  Illinois  and 
other  important  states  lying  between  also  stand  well.  New 
York,  under  its  present  law,  ranks  as  high  as  any  state  in  the 
Union. 

§  25.  Corporate  Laws  of  Different  States. 

Where  important  business  interests  and  valuable  prop- 
erty rights  are  involved  it  is  of  great  advantage  that  the  system 
of  corporate  laws  should  be  full,  comprehensive  and  judicially 
determined. 

Of  all  the  states  of  the  Union,  New  Jersey  has  probably 
the  advantage  in  this  respect.  She  was  the  first  to  enact  an 
effective  and  liberal  system  of  corporate  law.  Incorporators 


42  THE   CORPORATE   SYSTEM. 

from  all  over  the  country  were  attracted  by  the  excellence  of 
these  laws.  In  the  course  of  time  the  important  points  of 
doubtful  status  came  up  in  litigation  and  were  finally  settled. 
From  time  to  time,  as  defects  were  discovered,  her  corporation 
laws  were  amended,  until  to-day,  save  as  to  a  few  points,  she 
has  probably  the  most  generally  satisfactory  system  of  cor- 
poration laws  to  be  found  in  this  country. 

The  New  York  laws  have  always  ranked  well,  but  until 
recently  imposed  unnecessarily  onerous  liabilities  on  directors 
and  stockholders.  The  fees  were  also  excessive.  These  fea- 
tures have  been  removed  and  at  present  the  New  York  incorpo- 
ration laws  are  satisfactory  and  the  system  of  taxation  though 
unnecessarily  complicated  is  exceptionally  fair. 

In  permanency,  another  most  important  feature  of  cor- 
porate laws,  New  Jersey  again  stands  exceptionally  high,  and 
the  cheaper  localities  correspondingly  low.  In  New  Jersey  the 
corporate  system  has  been  gradually  shaped  into  a  nearly  per- 
manent form  requiring  but  little  change,  and,  save  for  some 
few  occasional  laws  passed,  apparently,  for  the  accommodation 
of  particular  corporate  interests,  her  Legislature  has  shown  a 
commendable  reluctance  to  interfere  with  these  laws,  unless 
for  their  obvious  betterment.  In  most  of  the  other  states  of 
the  Union  more  or  less  modification  of  the  existing  corpora- 
tion laws  is  to  be  expected  before  a  permanent  form  is  reached. 
In  states  such  as  New  York,  Pennsylvania,  Massachusetts, 
Illinois,  California,  these  changes  are  not  likely  to  be  radical, 
as  the  property  interests  involved  are  too  extensive  to  permit 
of  any  material  modifications  of  the  laws  by  which  these 
interests  are  held  and  administered. 

§  26.  Liabilities  Imposed  in  Different  States. 

When  the  selection  of  a  state  for  incorporation  is  under 
consideration  the  special  liabilities  attaching  to  directors  and 
stockholders  of  a  corporation  are  matters  for  careful  investi- 
gation. The  unusual  stock  liabilities  found  in  Minnesota  and 
California  are  very  serious,  if  not  insuperable,  objections  to 


WHERE    TO    INCORPORATE.  43 

incorporation  in  these  states.  In  the  cheap  localities  the  usual 
liability  on  unpaid  stock  exists,  but  there  are  no  special  liabili- 
ties of  either  directors  or  stockholders. 

In  the  more  important  incorporating  states  stockholders 
generally  have  no  liabilities  save  on  unpaid  stock,  though  in 
Massachusetts,  New  York  and  a  few  other  states  there  is  a 
stockholders'  liability  to  laborers  employed  by  the  corporation. 
Also  in  Idaho,  Minnesota  and  some  other  states  failure  to 
observe  certain  requirements  as  to  corporate  organization  and 
procedure  may  involve  stockholders  in  liability,  and  in  a  num- 
ber of  states  the  legislatures  have  re-enacted  the  common  law 
liability  of  stockholders — which  exists  in  all  states — for  divi- 
dends or  other  disbursements  to  the  stockholders  which  im- 
pair the  capital  stock. 

Directors  are  in  most  of  the  states  only  held  liable  for 
negligence  or  direct  fraud. 

§  27.  Protection  of  Minority  in  Different  States. 

This  feature  is  at  times  of  very  great  importance.  It  could 
hardly  be  satisfactorily  secured  in  either  Arizona  or  the  Dis- 
trict of  Columbia,  special  charter  provisions  not  being  per- 
mitted in  those  localities.  In  South  Dakota,  while  special 
charter  provisions  are  not  allowed,  the  right  to  cumulative 
voting  is  effectually  secured  by  the  constitution  of  the  state, 
and  the  minority  is  to  that  extent  protected. 

In  New  Jersey  and  New  York  protection  may  be  secured 
by  charter  provisions.  In  Maine  it  may  only  be  had  by  by- 
law enactment,  which,  as  the  by-laws  are  subject  to  repeal  by 
the  majority,  is  practically  no  protection.  (See  Chap. 
XXXVI,  Protection  of  Minority.) 

§  28.  General  Rules  for  Selection  of  State. 

Uusually  the  selection  of  the  place  of  incorporation  will  be 
determined  by  the  particular  conditions.  The  more  important 
of  the  few  general  rules  that  can  be  given  are  as  follows : 

( i )  A  corporation  having  but  one  plant  or  place  of  busi- 


44  THE    CORPORATE    SYSTEM. 

ness,  in  which  all  or  the  greater  part  of  its  capital  is  involved, 
should  be  incorporated  in  the  state  where  that  plant  or  place 
of  business  is  located. 

(2)  Any  large    corporation,    or    industrial    combination, 
formed  to  transact  business  or  operate  plants  in  a  number  of 
states  will,  for  the  reasons  already  given,  find  incorporation 
in  New  Jersey  advantageous.     Its  tax  rate  is  higher  than  in 
some  of  the  other  incorporating  states,  but  is  not  excessive. 
Of  late  years  Maine  is  coming  into  favor  for  incorporations  of 
the  kind. 

(3)  Temporary  incorporations,  some  few  close  corpora- 
tions, purely  speculative  corporations,  incorporations  of  doubt- 
ful stability,  and  all  other  corporations  desiring  the  maximum 
of  capitalization  with  the  minimum  of  expense  and  restriction, 
will  naturally  gravitate  to  the  bargain-counter  localities,  where 
the  cost  of  incorporation  is  nominal. 


CHAPTER  V. 
COST  OF  INCORPORATION. 


§  29.  General. 

The  direct  expenses  of  incorporation  are  the  initial  taxes 
paid  the  state  authorities,  counsel  fees,  the  incidental  fees 
for  filing  and  acknowledgments,  and  the  cost  of  the  cor- 
porate equipment.  Thereafter  the  expenses  are  presumably 
the  same  as  for  an  unincorporated  concern,  save  for  the 
annual  franchise  tax  and  possibly  an  increased  property 
taxation  that  may  result  from  the  greater  difficulty  of 
evasion  under  the  corporate  form. 

The  incidental  expenditures  are  usually  trifling.  The 
initial  state  fees  and  the  subsequent  annual  taxation  are 
more  serious.  As,  however,  these  differ  greatly  in  the  vari- 
ous states,  only  a  general  consideration  of  the  subject  can 
be  undertaken  here. 

§  30.  Organization  Fees  and  Annual  Taxes. 

In  deciding  upon  a  locality  for  incorporation  the  matter 
of  fees  and  taxes  is  often  given  undue  importance.  Unless 
the  saving  is  considerable,  it  is  rarely  expedient  to  incor- 
porate in  a  foreign  state  on  that  account  alone.  In  many 
cases  really  important  advantages  are  sacrificed  for  the 
sake  of  immaterial  savings  in  fees.  The  following  tables 
give  the  fees  for  incorporation  and  annual  taxes  in  a  few 
of  the  states  most  utilized  for  general  incorporation  pur- 
poses. 

45 


46 


THE    CORPORATE    SYSTEM. 


COMPARATIVE  TABLE  OF   ORGANIZATION    EXPENSES. 
Including  all  Filing  and  Incidental  Fees. 


CAPITAL  STOCK 
OF  COMPANY. 

NEW  JERSEY. 

NEW  YORK. 

DELAWARE. 

MAINE. 

SOUTH 
DAKOTA. 

$1,000 

$35  oo 

$16  oo 

$25  oo 

$27  oo 

$13  oo 

5,000 

35  oo 

17  50 

25  oo 

27  co 

13  oo 

10,000 

35  °° 

20  oo 

25  oo 

27  oo 

13  oo 

25,000 

35  °° 

27  50 

25  oo 

67  oo 

13  oo 

50,000 

35  oo 

40  oo 

25  oo 

67  oo 

18  oo 

100,000 

35  oo 

65  oo 

25  oo 

67  oo 

18  oo 

500,000 

no  oo 

265  oo 

65  oo 

67  oo 

23  oo 

1,000,000 

210  00 

515  oo 

115  oo 

117  oo 

28  oo 

5,000,000 

1,010  00 

2,515  oo 

365  oo 

517  oo 

43  0° 

10,000,000 

2,OIO  OO 

5,015  oo 

615  oo 

1,017  oo 

43  o° 

COMPARATIVE  TABLE  OF  ANNUAL  FRANCHISE  TAXES. 


$1,000 

$1  OO 

$1  50 

$5  oo 

$5  oo 

None. 

5,000 

5  oo 

7  50 

5  oo 

5  oo 

' 

10,000 

10  00 

15  oo 

5  oo 

5  oo 

( 

25,000 

25  oo 

37  50 

5  oo 

5  oo 

50,000 

50  oo 

75  oo 

10  00 

5  oo 

100,000 

100  00 

150  oo 

10  00 

10  00 

500,000 

500  oo 

750  oo 

25  oo 

50  oo 

1,000,000 

1,000  00 

1,500  oo 

50  oo 

75  oo 

5,000,000 

4,000  oo 

7,500  oo 

150  oo 

275  oo 

10,000,000 

4,250  oo 

15,000  oo 

275  oo 

525  oo 

It  is  to  be  noted  that  all  such  tables  of  comparative  ex- 
penses are  misleading  without  some  explanation.  For  instance, 
the  annual  taxes  of  the  preceding  table  are  based  on  the  sup- 
position that  in  each  case  the  entire  stock  of  the  corporation 
is  issued  and  outstanding.  Also  the  annual  taxes  as  given  are 
exclusive  of  the  usual  tax  imposed  on  any  real  or  personal 
property  held  in  the  state,  which  is  taxed  in  all  respects  as 
if  owned  by  an  individual.  In  New  York  the  annual  tax 
varies  with  the  conditions,  and,  as  given  in  the  table,  is  based 
on  the  supposition  that  (i)  all  of  the  capital  is  issued  and 
(2)  is  employed  in  the  state,  and  (3)  is  paying  six  per  cent, 
dividends. 

In  the  table  as  given  the  usual  incidental  expenses  of 
each  state  have  been  included  as  part  of  the  organization 
tax.  These  incidental  fees  vary.  In  New  York  they  amount 


COST    OF   INCORPORATION  4? 

to  $15;  in  New  Jersey  $10;  in  Delaware  $15;  in  Maine  $17; 
in  South  Dakota  $3 ;  in  Arizona  $20  to  $30. 

The  comparative  cost  of  incorporation  only  comes  up 
for  consideration  when  foreign  incorporation  is  contem- 
plated. In  all  such  cases  the  cost  of  keeping  up  a  state  office 
and  agent  in  the  selected  state  is  to  be  added  to  the  usual 
expenses.  This  would  vary  from  $25  to  $50  annually  for 
corporations  of  moderate  capitalization,  and  usually  includes 
assistance  in  holding  annual  meetings  in  the  state  and  such 
attention  to  state  reports  as  is  demanded  by  the  local  law. 

It  is  to  be  noted  that  the  annual  franchise  tax  in  New 
Jersey  amounts  to  a  very  considerable  sum.  In  New  York, 
a  corporation  doing  all  its  business  outside  of  the  state, 
and  merely  maintaining  an  office  in  the  state  for  its  books 
and  meetings,  pays  no  annual  franchise  tax.  The  annual 
franchise  tax  in  Maine  is  moderate.  In  the  District  of 
Columbia,  Connecticut,  South  Dakota,  Arizona,  and  some 
other  of  the  western  states  there  is  no  annual  franchise 
taxation.  In  considering  the  question  of  cost,  it  is  to  be 
remembered  that  foreign  corporations  are  usually  required 
to  pay  license  fees  and  taxes  in  the  states  in  which  they  do 
business,  and  often  foreign  incorporation  merely  adds  the 
cost  of  the  outside  incorporation  to  the  taxes  that  cannot 
be  avoided  in  the  state  in  which  the  corporation  conducts  its 
operations.  In  some  cases,  however,  a  foreign  incorporation 
may  save  onerous  local  taxation  as  in  the  case  of  People,  etc., 
vs.  Feitner,  54  N.  Y.  App.  Div.,  217  (1906).  Here  foreign 
incorporation  would  have  saved  the  corporation  over  $30,000 
per  annum. 

§  31.  Avoiding  Fees  and  Taxation. 

As  stated  elsewhere,  it  is  usually  advisable  for  an  incor- 
poration to  be  taken  out  in  that  state  where  the  principal 
business  is  to  be  conducted.  At  times,  however,  the  incor- 
porating fees  are  so  excessive  that  the  corporation  is  forced 


48  THE   CORPORATE    SYSTEM. 

to  resort  to  another  state  where  the  fees  are  less  onerous, 
doing  business  in  its  own  state  thereafter  as  a  foreign  cor- 
poration. For  instance,  had  the  Steel  Trust  incorporated  in 
Pennsylvania,  which  would  naturally  have  been  its  home 
state,  its  initial  fees  would  have  amounted  to  over  $3,500,000. 
In  the  state  selected — New  Jersey — these  fees  amounted 
to  but  $220,000. 

Such  incorporation  in  a  less  expensive  state  is  the  most 
obvious  method  of  avoiding  or  reducing  excessive  state  fees, 
but  it  is  not  always  practicable.  Conditions  may  exist  which 
fix  the  state  of  incorporation  despite  the  question  of  fees,  and 
it  then  becomes  a  matter  of  importance  to  reduce  these  fees 
and  the  annual  taxation  thereafter  to  the  lowest  possible  figure. 

Where  a  corporation  is  organized  to  take  over  a  business  or 
property  it  is  often  possible  and  frequently  distinctly  advan- 
tageous to  issue  bonds  in  part  payment  for  the  property  taken 
over.  The  necessary  capitalization  of  the  company  is  thereby 
reduced  by  just  the  amount  of  this  bond  issue,  and  the  state 
fees  and  the  state  taxation  thereafter  are  also  proportionately 
less.  Also,  in  many  states,  the  corporation,  in  rendering  its 
statement  of  taxable  property,  is  allowed  to  deduct  any  out- 
standing indebtedness.  The  bond  issue  is  an  entirely  legit- 
imate indebtedness  and  as  such  in  these  states  is  deducted  from 
the  taxable  property  of  the  corporation  in  ascertaining  the 
basis  of  taxation.  This  law  was  sustained  by  the  decision  in 
People,  etc.,  vs.  Barker,  139  N.  Y.,  63  (1894),  an  extreme 
case,  where  the  corporation  under  consideration  had  an  out- 
standing bond  issue  of  $2,250,000,  an  amount  far  in  excess 
of  its  total  capital  stock,  and  at  least  twice  the  amount  of  its 
actual  assets.  In  this  decision  the  Court  said : 

"  This  indebtedness  must  in  the  nature  of  things  be 
taken  into  consideration  in  arriving  at  the  value  of  the 
capital  of  the  relator.  And  when  it  is  seen  that  the  in- 
debtedness of  a  corporation  is  double  the  amount  of  all 
its  assets,  it  follows,  upon  the  system  adopted  by  the 
State  for  the  assessment  of  corporations  that  the  actual 
value  of  the  capital  of  such  a  corporation  is  zero." 


COST    OF    INCORPORATION.  49 

In  some  states  a  corporation  is  taxed  in  the  place  where  its 
principal  place  of  business  is  located,  and  this  principal  place 
of  business  is  named  in  and  fixed  by  its  charter.  This  obtains  in 
New  York.  -Accordingly,  the  Union  Steamboat  Company  of 
that  state,  operating  principally  in  Buffalo,  where  it  employed 
twenty  steam  propellers  and  conducted  a  profitable  business, 
selected  by  charter  designation  an  obscure  little  hamlet  in  the 
southern  part  of  the  state  as  its  principal  place  of  business. 
Here  taxation  was  low  and  assessors  lenient  and  the  com- 
pany made  good  the  statement  of  its  charter  by  renting  a  room, 
putting  up  its  sign  thereon  and  holding  its  annual  meeting 
therein. 

This  went  on  without  objection  for  some  six  years,  when 
the  Buffalo  assessors  woke  to  the  fact  that  the  city  was  not 
receiving  its  apparent  dues,  and  thereupon  promptly  assessed 
the  corporation  on  some  $600,000  of  personal  property.  The 
company  paid  the  tax  under  protest  and  then  brought  suit  to 
recover  the  amount  so  paid.  Judgment  was  in  favor  of  the 
corporation  and  on  appeal  to  the  highest  court  was  sustained. 
The  court  in  its  decision  (Union  Steamboat  Company  vs.  City 
of  Buffalo,  82  N.  Y.,  351,  1880)  stated  that  if  the  scheme 
was  a  device  to  avoid  taxation  the  evil  must  be  corrected  by 
other  authorities,  not  by  the  courts. 

It  was  to  be  supposed  that  the  legislature  would,  in  accord- 
ance with  the  suggestion  of  the  court,  have  promptly  remedied 
this  defect  in  the  corporation  laws,  but,  although  it  is  now 
more  than  twenty  years  since  this  case  was  decided,  nothing 
has  been  done,  and  many  New  York  corporations  have  since 
availed  themselves  of  this  legal  method  of  evading  taxation. 

A  more  intricate  method  of  avoiding  taxation  sometimes 
followed  is  the  organization  of  a  company  with  the  desired 
name,  purposes  and  capitalization  in  some  state,  as  Maine, 
South  Dakota  or  Arizona,  where  taxation  is  nominal,  stock 
being  issued  for  property  in  apportionment  of  interests  and 
for  other  purposes  as  necessary.  This  is  the  actual  corpora- 
tion. A  small  operating  company  is  then  incorporated  in  the 


50  THE   CORPORATE    SYSTEM. 

state  in  which  the  business  is  to  be  really  conducted,  with  the 
same  name  and  purposes,  but  with  a  nominal  capitalization, 
possibly  only  one  per  cent,  of  that  of  the  larger  corporation. 
The  smaller  corporation  then  acts  as  the  local  agent  of  the 
larger  corporation,  under  such  arrangement  as  the  particular 
conditions  indicate,  the  larger  corporation  not  appearing 
actively  in  the  conduct  of  the  business. 

The  small  corporation  is  either  managed  so  as  to  make  no 
profits,  all  these  being  diverted  to  the  larger  corporation,  or 
its  stock  is  held  either  by  the  larger  corporation  or  by  the 
stockholders  of  the  larger  corporation  in  due  proportion.  The 
officers  of  the  smaller  corporation  would  usually  be  the  same 
as  for  the  larger  corporation,  and  this  latter  might  guarantee 
accounts,  or  otherwise  assist  the  small  corporation  with  its 
credit. 

It  is  obvious  that  organization  fees  and  taxes  would  by  this 
method  be  largely  avoided,  and  that  both  state  and  local  taxa- 
tion thereafter  might  be  materially  lessened  if  not  almost 
entirely  evaded.  The  general  plan  is,  however,  difficult  and 
complicated  and  requires  the  assistance  of  able  counsel  for  its 
successful  execution. 

In  some  states  taxes  are  arranged  upon  a  sliding  scale, 
depending  upon  the  rate  of  dividends  paid.  Where  this  is  true, 
close  corporations  may  advantageously  reduce  their  dividends 
by  the  disposal  of  profits  as  salaries,  instead  of  allowing  them 
to  accumulate  and  be  distributed  as  dividends. 

In  many  states  manufacturing  corporations  are  either  en- 
tirely released  from  the  payment  of  state  franchise  taxes  or 
are  granted  a  more  liberal  basis  or  rate.  Such  exemption 
would  naturally  be  claimed  as  far  as  possible. 

The  whole  system  of  taxation  is  unsatisfactory  and  in- 
equitable. Many  corporations  make  false  returns,  shift  cash 
accounts,  manufacture  fictitious  indebtedness  and  resort  to 
other  expedients  of  doubtful  legality  or  morality,  in  order  to 
relieve  the  burden  of  taxation.  The  methods  heretofore 
outlined  and  such  others  along  the  same  lines  as  the  statutes 


COST    OF    INCORPORATION.  51 

of  the  various  states  may  allow,  while  legal,  are  not  free 
from  criticism.  They  are  to  a  certain  extent  evasions  of 
the  spirit  of  the  law.  If,  however,  the  legislature  in  its 
wisdom  has  decreed  that  a  corporation  organized  with  both 
stock  and  bonds  shall  have  these  latter  deducted  from 
the  former  in  order  to  establish  its  taxable  status,  or  that 
an  obscure  village  where  taxes  are  light  may  be  selected 
by  a  wealthy  city  corporation  as  its  principal  office  for 
taxation,  there  would  seem  no  valid  business  reason  why 
corporations  should  not  take  advantage  of  the  situation 
while  it  lasts  and  avoid  all  such  taxation  as  may  be  without 
fraud  and  subornation  of  perjury.  The  same  is  to  be  said 
of  the  practice  of  incorporating  in  an  outside  state  where 
taxation  is  less  and  doing  business  at  home  as  a  foreign 
corporation.  It  is  not  a  manifestation  of  the  highest  spirit 
of  civic  patriotism,  but  it  is  not  so  repugnant  to  this  spirit 
as  are  the  perjury  and  falsification  which  too  often  pre- 
vail in  the  matter  of  tax  returns. 

§  32.  Counsel  Fees. 

The  corporation  is  a  creature  of  the  law  and  in  its  formation 
every  requirement  of  the  law  must  be  carefully  observed.  It  is 
not  sufficient  that  the  corporation  be  merely  brought  into  exist- 
ence. With  the  aid  of  a  printed  charter  form,  and  a  ready- 
made  set  of  by-laws,  even  the  inexperienced  may  do  this.  It 
must  be  incorporated  under  the  proper  forms  and  with  ap- 
proved arrangements  and  with  such  knowledge  of  the  condi- 
tions and  possibilities  that  it  secures  every  legitimate  advantage 
allowed  or  permissible  under  the  laws  which  authorize  its  crea- 
tion. For  this  reason  lawyers,  and  the  inevitable  concomitant, 
lawyers'  fees,  are  important  features  of  any  incorporation  in 
which  actual  values  are  involved. 

Where  cheap  incorporations  are  imperative,  or  where  the 
character  of  the  incorporation  does  not  justify  the  employment 
of  an  attorney,  the  incorporating  agencies  are  usually  employed 


52  THE  CORPORATE    SYSTEM. 

and  charge  from  $25  to  $50  for  their  services  in  conducting 
the  incorporation.  This  incorporation  is  then  secured  in  one 
of  the  cheaper  incorporating  states  and  is  not  usually  worth 
more  than  the  amount  paid. 

For  the  better  class  of  incorporations  where  a  really  sound 
and  effective  organization  is  desired  the  fees  of  any  qualified 
attorney  would  hardly  be  less  than  $50,  and  from  this  would 
range  far  upward  according  to  the  complexity  of  the  arrange- 
ments, the  standing  and  experience  of  the  counsel  and  the 
increase  of  responsibility  as  property  values  increase. 

It  is  to  be  noted  that  an  incorporation  differs  from  the  con- 
duct of  litigation  in  the  fact  that  the  amount  of  work  and  re- 
sponsibility involved  may  be  estimated  in  advance  with  reason- 
able accuracy.  For  this  reason  the  prospective  counsel  fees 
may  be  determined  with  precision  and  are  usually  agreed  upon 
before  incorporation  is  undertaken. 

The  reputation  of  the  counsel  employed  may  not  only  have 
a  direct  bearing  on  the  charter  and  value  of  an  incorporation, 
but  may,  and  frequently  does,  assist  materially  in  the  subse- 
quent sale  of  corporate  securities  and  in  the  general  welfare 
of  the  corporation.  If  the  incorporation  counsel  rank  high, 
his  name  in  connection  with  the  corporation  is  not  only  a 
guarantee  of  its  technical  correctness,  but  of  the  propriety  of 
its  purposes,  the  solidity  of  its  undertaking,  and,  generally,  of 
the  status  and  character  of  the  whole  enterprise.  For  this  rea- 
son the  fees  of  counsel  eminent  in  this  line  rank  far  above  any 
justifiable  compensation  for  the  work  actually  involved  in  the 
incorporation. 

§  33.  Corporate  Equipment. 

The  cost  of  the  stock  books,  certificates,  seal,  etc.,  necessary 
or  usually  employed  in  connection  with  a  corporation  varies 
widely  according  to  the  nature  of  the  outfit.  The  ordinary 
corporation  of  moderate  capitalization  and  pretensions,  desi- 
rous of  restricting  its  expenditures  may  secure  everything  nec- 
essary, and  in  neat  and  attractive  shape,  for  the  modest  sum  of 


COST    OF    INCORPORATION.  53 

$10.  This  includes  stock  certificates,  printed  on  lithographed 
blanks,  the  corporate  seal,  minute  book,  stock  book  and  trans- 
fer book. 

If  a  handsomer  outfit  is  required,  with  special  lithographed 
designs  for  certificates,  and  more  impressive  bindings  on  the 
books,  the  price  of  the  outfit  will  easily  run  up  to  $40  or  $50 
and  more.  If  specially  engraved  certificates  are  requisite  or 
desired,  this  price  will  be  increased  to  anywhere  from  $100  to 
$500,  according  to  designs,  character,  etc. 

The  corporate  books  of  account  need  be  no  different  either 
in  kind  or  cost  from  those  used  by  the  unincorporated  concern. 


PART  IL-STOCK  AND  STOCKHOLDERS. 


CHAPTER   VI. 
THE  CAPITALIZATION. 


§  34.  Basis  of  Capitalization. 

In  the  earlier  history  of  the  business  corporation,  its  capi- 
tal stock  was  usually  determined  by  the  amount  deemed  neces- 
sary for  the  particular  enterprise,  or  by  the  amount  of  cash 
subscriptions  which  could  be  secured  for  its  exploitation.  In 
either  case  the  capitalization  was  intended  to  represent  the 
actual  cash  or  property  values  originally  invested  in  the  enter- 
prise. 

At  the  present  time,  the  theory  of  capitalization  has  been 
somewhat  modified  and  extended,  and  even  in  conservative  op- 
erations, at  least  a  portion  of  the  earning  value  is  included 
in  the  original  capitalization. 

The  general  theory  is  simple.  Any  enterprise  may  be  con- 
sidered as  worth  the  amount  upon  which,  with  due  regard  to 
sinking  fund  and  maintenance  requirements,  it  can  pay  fair 
dividends  and  may  justly  be  capitalized  at  that  figure.  In 
other  words,  the  earning  capacity  of  the  enterprise  rather  than 
the  cash  value  of  the  property  involved  forms  the  modern  basis 
of  capitalization. 

As  stated  by  a  writer  of  eminence  in  financial  matters  in  a 
recent  discussion  of  this  method : 

"  It  is  not  good  financing  to  capitalize  a  company  at 
only  the  value  of  its  tangible  assets — as  if  any  sum  over 
that  value  was  '  water/  A  manufacturer  who  does  not 
on  the  average  earn  considerably  more  than  the  usual 

54 


THE    CAPITALIZATION.  55 

rate  of  interest  upon  the  actual  cost  of  his  plant  might 
better  go  out  of  business  and  invest  his  money  in  bond 
and  mortgage.  Business  men  consider  themselves  enti- 
tled to  at  least  12^  per  cent,  upon  their  actual  capital. 
If,  then,  assuming  high  earnings  when  forming  a  com- 
bination, a  banking  house  should  issue  preferred  and 
common  stock  in  amounts  each  equal  to  the  value  of  the 
plant,  it  would  not  be  stock  watering.  The  difference 
between  cost  of  plant  and  earning  capacity,  whether  we 
call  it  value  of  patents  and  trade-marks  or  good- will,  is 
just  as  legitimate  an  asset  of  a  company  as  is  its  mer- 
chandise, though  harder  to  appraise  properly."  (Thomas 
L.  Greene,  in  New  York  Times.) 

If  fairly  done  and  kept  within  reasonable  bounds,  this  gen- 
eral basis  of  capitalization  is  hardly  open  to  serious  objection. 
On  the  contrary,  in  many  cases  there  are  substantial  business 
reasons  for  its  adoption.  If  the  enterprise  be  capitalized  on  the 
basis  of  its  immediate  cash  or  cost  value,  it  may,  and  should, 
if  meritorious,  pay  dividends  far  above  the  regular  rates  of 
interest  or  the  usual  returns  on  invested  funds.  The  fact  of 
the  stock  paying  unusual  dividends  inevitably  attracts  attention, 
provokes  opposition  and  invites  competition. 

Also  stock  in  a  dividend-paying  concern  may  usually  be 
sold  at  a  better  price  on  a  large  capitalization,  if  this  latter  be 
justified  by  the  dividend  paid,  than  it  possibly  could  on  a  more 
conservative  valuation. 

For  instance  if  an  enterprise  were  capitalized  at  such 
a  figure,  say  $200,000,  that  it  could  earn  and  pay  a  regular 
annual  dividend  of  6  per  cent.,  its  stock  should  sell  readily 
at  par,  or  100.  If  its  capitalization  were  reduced  one-half 
namely  $100,000,  so  that  its  regular  annual  dividend  became 
12  per  cent,  the  stock  having  twice  the  earning  power,  and 
representing  the  same  corporate  property,  should,  theo- 
retically, sell  at  twice  par,  or  200.  As  a  matter  of  fact  it 
would  do  nothing  of  the  kind,  ordinarily  bringing  from 
175  to  1 80  according  to  circumstances  and  showing  the 
"  cashing  "  value  of  the  smaller  capitalization  to  be  from 


56  STOCK   AND    STOCKHOLDERS. 

10  to  12%  per  cent,  less  than  that  of  the  larger.  That  is, 
the  smaller  capitalization  would  involve  a  loss  on  the  sale 
of  the  entire  capital  stock  of  from  $20,000  to  $25,000.  As 
long  as  this  is  true,  enterprises  will  be  capitalized  on  their 
earning  capacity  rather  than  on  their  actual  immediate  value. 

Also  if  capital  is  to  be  raised  for  the  newly  organized 
corporation,  the  larger  capitalization,  if  within  reasonable 
limits,  gives  much  the  better  basis  for  the  sale  of  stock. 
Greater  inducements — at  least  in  appearance — may  be 
offered  the  buyer,  and  from  the  standpoint  of  future  trans- 
actions the  position  of  the  buyer  himself  is  better. 

For  these  and  other  reasons  the  general  practice  at 
the  present  time,  even  in  conservative  circles,  is  to  capital- 
ize at  that  amount  upon  which  the  enterprise  or  under- 
taking may  be  reasonably  expected  to  pay  fair  dividends — 
that  is,  the  earning  capacity  is  made  the  basis  of  capitaliza- 
tion. The  practice  is  often  deprecated  and  may  easily  be 
carried  to  a  point  at  which  it  becomes  alike  dangerous,  and 
at  times  dishonest.  Kept  within  reasonable  bounds,  how- 
ever, it  would  not  seem  to  be  objectionable  either  from  the 
standpoint  of  morals  or  sound  finance  and  it  does  give  cer- 
tain legitimate  advantages.  (See  Chapter  XXXII,  Issuance 
of  Stock  for  Property.) 

§  35.  Capitalization  at  Less  than  Real  Values. 

In  many  cases  the  owners  of  small  businesses  in  which 
but  a  few  people  are  interested  and  to  which  others  are  not 
to  be  admitted,  find  it  advantageous  to  incorporate  at  a 
capitalization  much  below  the  real  value  of  the  concern. 
Other  conditions  also  arise  in  which  the  corporation  with 
capitalization  below  its  real  value  is  a  convenient  business 
mechanism.  The  arrangement  is  frequently  advisable  where 
sales  of  stock  are  not  contemplated  and  in  all  those  cases 
where  merely  an  apportionment  of  interest  is  desired  under 
the  corporate  form.  The  fees  and  taxes  are  thereby  kept 
at  the  minimum,  the  attention  of  competitors  is  not 


THE    CAPITALIZATION.  57 

attracted,  the  organization  itself  may  be  made  very  simple 
and  every  purpose  of  the  incorporation  is  effectively  ful- 
filled. 

In  states  where  a  tax  is  levied  on  the  capital  stock,  such 
tax  may  be  largely  and  legitimately  avoided  by  a  small 
capitalization.  If  it  is  essential  that  the  full  values  be  repre- 
sented in  some  way,  the  small  capitalization  may  still  be 
retained  if  desired,  and  the  excess  be  covered  by  the  issue 
of  bonds  or  debentures. 

In  those  small  and  close  corporations  where  profits 
threaten  to  become  excessive  as  compared  with  the  capital- 
ization, the  dividend  rate  is  sometimes  kept  down  by  the 
distribution  of  surplus  profits  under  the  guise  of  salaries. 
It  need  hardly  be  said  that  the  plan  can  only  be  adopted 
with  justice  and  safety  when  all  the  stockholders  participate 
in  due  proportion  in  these  liberal  emoluments.  If  fairly 
carried  out  the  practice  is  legitimate.  The  reduction  of 
profits  is  sometimes  effected  by  less  defensible  methods. 

§  36.  Capitalization  at  Real  Values. 

In  banks  and  other  financial  institutions  this  is  the 
invariable  rule.  Beyond  this,  in  those  states  where  a  double 
liability  attaches  to  the  stock  of  financial  institutions,  the 
more  solid  of  these  put  the  subscription  price  at  double 
the  par  value  of  their  stock  in  order  to  cover  this  liability 
in  advance.  At  the  same  time  they  thereby  establish  a 
reserve  equal  in  amount  to  their  capitalization. 

In  most  mercantile  businesses  it  is  usual  to  approximate 
the  real  value  of  the  enterprise  in  the  capitalization.  Such 
valuation  may,  it  is  true,  include  good-will,  trade  names  and 
the  other  more  or  less  intangible  assets  of  the  business  that 
differentiate  the  going  concern  from  a  dead  stock  of  goods. 
In  any  established  business,  however,  these  values  are  quite 
as  actual  as  any  of  the  more  material  properties,  and  are 
quite  as  properly  included  in  the  capitalization. 


58  STOCK    AND    STOCKHOLDERS. 

§  37.  Capitalization  on  Earning  Capacity. 

This  is  the  rule  in  capitalizing  corporate  combinations 
and  public  utilities.  Usually  bonds,  or  preferred  stock  or 
both  are  issued  to  the  extent  of  the  real  values;  then  com- 
mon stock  is  issued  to  such  amount  as  the  estimated  earn- 
ing capacity  will  carry  after  payment  of  the  dividends  and 
interest  on  preferred  stock  and  bonds.  The  overwhelming 
volume  of  watered  stock  emanating  from  these  sources  is 
due  to  the  excessively  optimistic  estimates  of  earning 
capacity  made  by  the  promoters.  If  the  earning  capacity 
were  actually  equal  to  the  burden  imposed  upon  it,  the  large 
issues  of  stock  would,  from  some  points  of  view,  be  fully 
justified,  but,  in  most  cases  of  this  kind,  the  dividends  are 
uncertain  and  irregular  and  too  frequently  fail  altogether. 
(See  Chap.  XL,  Industrial  Combination.) 

In  determining  the  capitalization  for  speculative  cor- 
porations, to  be  organized  to  exploit  mines,  inventions  and 
other  uncertain  undertakings,  the  same  liberal  spirit  pre- 
vails, the  promoters  estimating  future  earning  powers  on 
the  basis  of  their  expectations,  and  then  capitalizing  these 
anticipations.  In  some  few  cases,  such  enterprises  succeed 
and  dividends  are  paid  up  to  the  promoter's  brightest  hopes. 
These  few  and  exceptional  instances  then  become  an  alleged 
justification  for  the  over-capitalization  of  all  similar  under- 
takings. 

No  safe  rules  can  be  formulated  for  the  capitalization 
of  these  uncertain  enterprises.  Usually  their  stock  must 
be  sold  at  a  tremendous  discount  from  face  value.  This 
calls  for  a  proportionately  large  over-capitalization  to 
which  it  is  not  possible  to  apply  the  ordinary  principles  of 
business.  Caveat  emptor. 

§  38.  Capitalization  of  Good- Will. 

In  the  incorporation  of  any  going  concern,  or  of  any 
combination  or  re-organization  of  going  concerns,  good- 
will is  an  asset  of  much  importance  and  is,  as  a  matter  of 


THE    CAPITALIZATION.  59 

course,  included  among  the  other  assets  to  be  capitalized. 
This  practice  is  entirely  legitimate  as  the  good-will  stands 
for  the  difference  between  a  live  business  and  the  property 
value  of  the  stock,  equipments  and  other  items  which  make 
up  its  implements  of  trade.  As  a  matter  of  fact,  the  good- 
will is  not  infrequently  the  most  valuable  asset  of  the  con- 
cern, even  where  other  assets  are  of  considerable  worth. 

On  account  of  the  intangible  nature  of  good-will,  its 
correct  appraisement  is  often  a  matter  of  very  considerable 
difficulty.  Its  value  varies  with  local  conditions  and  is,  at 
the  best,  almost  entirely  a  matter  of  business  judgment. 
Because  of  this  difficulty  of  accurate  valuation,  good-will 
is  a  favorite  device  for  inflating  purposes,  and  frequently 
affords  a  basis  for  unjustifiable  stock  watering. 

In  the  ordinary  mercantile  incorporation  good-will  is  often 
included  without  specific  recognition.  A  lump  sum  is  put  upon 
the  business  as  a  whole  and  the  corporation  capitalized  at  the 
figure  so  obtained.  At  other  times  a  separation  is  effected  be- 
tween the  property  assets  and  the  valuable  and  intangible  asset, 
good-will.  Where  this  is  done,  common  stock  is  frequently 
issued  to  the  appraised  value  of  the  good-will,  while  the  cash 
and  accounts,  stock,  machinery,  realty  and  other  property  as- 
sets are  provided  for  by  an  issue  of  preferred  stock,  the  two 
issues  making  up  the  total  capitalization  of  the  corporation. 

In  this  case  the  preferred  stock  represents  the  tangible  as- 
sets, and  its  preference  dividend  is  in  the  nature  of  a  high  inter- 
est on  the  actual  value  of  this  property.  In  the  event  of  the 
dissolution  or  liquidation  of  the  corporation,  this  preferred 
stock  is  frequently  paid  out  or  redeemed  before  the  common 
stock  receives  anything.  (See  Chap.  VIII,  Preferred  Stock.) 

The  common  stock,  on  the  other  hand,  representing  the 
intangible  assets — the  good-will  and  earning  capacity  of  the 
business — receives  no  dividend  of  any  kind  until  all  other  obli- 
gations have  been  paid  and  then  only  out  of  surplus  profits. 
(See  §250.) 


60  STOCK    AND    STOCKHOLDERS. 

§  39.  Form  of  Capitalization. 

After  deciding  upon  the  capitalization  of  an  enterprise,  a 
further  question  arises  as  to  the  form  of  this  capitalization. 
The  simplest  plan  is  to  have  only  common  stock,  but  at  times 
there  are  material  advantages  in  the  use  of  preferred  stock. 

Preferred  stock  occupies  a  position  between  common  stock 
and  the  bond.  It  is  a  safer  form  of  investment  than  common 
stock,  but  it  carries  no  rights  of  foreclosure.  It  takes  prece- 
dence of  common  stock  as  to  payment  of  dividends  and  fre- 
quently as  to  its  ultimate  redemption,  but  its  dividend  is 
not  payable  unless  earned.  Its  dividend  is  fixed  and  it  does 
not  as  a  rule  participate  in  excess  profits,  but  its  rate  is  usually 
much  higher  than  the  interest  rate  of  a  bond.  Where  preferred 
stock  can  be  used  to  raise  money  it  is  regarded  as  a  much  more 
satisfactory  means  than  an  issue  of  bonds.  (See  Chap.  VIII, 
Preferred  Stock.) 

§  40.  Bond  Issues. 

Where  a  corporation  has  real  property  or  invests  in  prop- 
erty having  a  tangible  value,  it  is  often  of  advantage  to  issue 
bonds  in  place  of  some  portion  of  the  stock  capitalization.  An 
enterprise  requiring  $150,000  in  actual  value  might  instead 
of  capitalizing  for  that  amount,  incorporate  for  but  $100,000, 
and  then  issue  bonds  for  the  additional  $50,000. 

The  interest  to  be  paid  on  these  bonds  would  be  less  than 
the  dividends  a  prosperous  business  would  pay  upon  the  same 
amount  of  stock  and  the  difference  represents  a  profit  for  the 
stock  actually  issued.  Against  this  is  the  fact  that  the  interest 
must  be  paid  whether  profits  justify  it  or  not,  as  also  the  fur- 
ther fact  that  if  interest  is  not  paid,  foreclosure  proceedings 
will  probably  bring  the  corporation  to  an  untimely  termination 
or  reorganization.  In  such  case  the  proceedings  are  usually 
disastrous  and  most  of  the  assets  are  likely  to  be  absorbed  in 
settling  the  claims  of  the  bondholders.  For  these  reasons  the 
issuing  of  bonds  is  not  safe  unless  the  corporation  is  sound  and 
of  quick  earning  powers.  If  there  is  any  doubt  on  these  points, 


THE    CAPITALIZATION.  61 

preferred  stock,  the  security  next  to  bonds  in  safety  and  de- 
sirability, is  the  more  prudent  method  of  raising  money. 

§  41.  Financial  Exigencies. 

If  an  enterprise  is  speculative  in  its  character,  and  direct 
profits  are  expected  from  its  financing,  or  if  promotion  pay- 
ments are  added  to  the  load  under  which  the  new  corporation  is 
expected  to  stagger  to  success,  the  conditions  do  not  tend  to 
conservative  capitalization.  In  such  cases  the  immediate  finan- 
cial necessities  take  precedence  of  almost  everything  else,  and 
the  capitalization  is  shaped  to  that  end.  Profits  for  owners  and 
promoters,  bonus  stock,  commissions,  advertising  and  the  gen- 
eral expenses  of  financing  are  included  until,  finally,  the  actual 
business  necessities  of  the  corporation  represent  but  a  fraction 
of  the  total  capitalization,  and  the  final  arrangement  at 
times  comes  dangerously  close  to  being  a  fraud  upon  the  in- 
vesting public. 

It  is  unfortunate  that  the  capitalization  of  a  corporation 
should  be  influenced  by  considerations  such  as  these.  At  times, 
however,  an  enterprise  will  be  of  such  a  purely  speculative  na- 
ture that,  with  all  honesty  of  purpose,  it  would  be  impossible 
to  finance  it  on  any  conservative  basis.  Concessions  to  the 
necessities  of  the  situation  are  then  imperative,  divergencies 
from  the  ideal  corporate  arrangements  cannot  be  avoided,  and 
the  best  that  can  be  done  is  to  reduce  them  to  the  minimum. 
In  such  cases,  the  real  interests  of  the  corporation — which  are 
the  successful  inauguration  and  prosecution  of  its  business  and 
the  production  of  profits  for  its  stockholders — should  be  kept 
closely  in  view,  and  only  such  concessions  made  as  are  abso- 
lutely essential  to  successful  financing. 


CHAPTER   VII. 
THE    STOCK    SYSTEM. 


§42.  Capital  Stock. 

The  capital  stock  or  capitalization  of  a  corporation  is  the 
maximum  amount  of  stock  it  may  issue  under  the  provisions 
of  its  charter.  This  may  bear  some  direct  relation  to  the 
actual  property  values,  or  "  capital  "  possessed  by  the  corpora- 
tion— from  which  it  is  to  be  absolutely  distinguished — or  may 
be  far  above  or  below  this  real  capital.  ( See  §  46. )  The  stock 
capitalization  may  be  based  on  the  actual  cash  value  of  the 
corporate  property,  or  on  the  amount  required  for  the  develop- 
ment of  the  undertaking,  or  on  the  earning  power  of  the  corpo- 
rate business,  or  on  the  speculative  basis  of  what  these  earning 
powers  may  be  when  the  business  is  developed,  or  on  some 
combination  of  these  factors. 

The  capital  stock  of  a  corporation  is  fixed  by  its  charter 
and  can  usually  be  increased  or  diminished  only  by  amendment 
of  that  instrument.  In  some  states,  however,  charters  are 
issued  empowering  the  corporation  itself,  within  certain  limits, 
to  determine  the  amount  of  its  capitalization. 

The  capital  stock  of  a  corporation  may  be  issued  in  part  or 
in  whole  and  its  total  authorized  amount  bears  no  necessary 
relation  to  the  amount  of  stock  sold,  subscribed  or  outstanding. 
For  instance,  a  corporation  with  a  capital  stock  of  $100,000 
might  have  issued  one-half  of  this  amount,  the  remainder  being 
reserved  for  subsequent  use.  The  outstanding  stock  would 
then  be  $50,000,  but  its  capital  stock  would  still  be  $100,000, 
unless  changed  by  amendment  of  the  charter,  or  other  statutory 
method. 

In  this  connection  it  should  be  noted  that  under  the 
common  law,  a  corporation  was  required  to  have  its  entire 


THE   STOCK    SYSTEM.  63 

capital  stock  subscribed  before  beginning  business.  Until 
this  was  done  it  could  not  enforce  the  subscriptions  to  its 
stock.  Now,  however,  in  most  states  the  stringency  of 
this  rule  has  by  statute  enactments  been  greatly  relaxed. 
Some  minimum  amount,  fixed  by  statute  and  usually  much 
smaller  than  the  total  capitalization,  may  be  designated 
by  the  charter  as  the  amount  with  which  the  corporation 
will  begin  business,  and  so  soon  as  this  amount  has  been 
subscribed,  the  corporation  can  enforce  subscriptions  to  its 
stock  and  may  begin  its  operations.  In  a  few  states  a  fur- 
ther proportion  of  the  capital  stock  must  be  paid  in  within 
a  specified  time,  as  in  New  York,  where  a  corporation  must 
have  at  least  one-half  its  total  capitalization  paid  up  within 
one  year  from  the  date  of  incorporation. 

§43.  Shares. 

For  the  sake  of  accuracy  and  convenience  in  represent- 
ing the  interests  of  the  various  stockholders  in  the  capitaliza- 
tion, and  in  the  corporate  enterprise  and  property  behind 
it,  capital  stock  is  divided  into  shares  which  are  almost 
invariably,  though  not  necessarily,  of  equal  value,  and 
together  make  up  the  whole  capitalization.  Unless 
restricted  by  statute  these  shares  may  be  of  any  desired  face 
value,  though  the  greater  portion  of  the  issued  stock  of  this 
country  is  in  the  form  of  $100  shares.  Mining  stocks  are 
often  issued  in  shares  of  the  face  value  of  $i,  this  being 
done  with  a  view  to  more  impressive  offerings,  and  to  the 
reception  of  smaller  subscriptions  than  could  well  be  taken 
with  larger  shares.  In  any  enterprise  to  be  financed  by 
popular  subscription,  to  have  a  small  share  value  is  con- 
sidered good  policy,  $10  being  the  figure  usually  selected. 
Where  the  holders  of  stock  are  few  in  number  and  it  is 
desirable  to  render  the  sale  or  other  disposition  of  the 
stock  difficult  or  other  reasons  make  such  course  advisable, 
the  face  value  of  the  shares — where  not  prohibited  by 
statute — is  sometimes  placed  at  $500  or  more.  The  shares 
of  the  Carnegie  Company  were  $1,000  each,  but  the 


64  STOCK    AND    STOCKHOLDERS. 

United  States  Steel  Corporation  placed  its  shares  at  $100 
each  in  order  that  they  might  be  sold  to  the  investing 
public. 

Unless  there  is  some  valid  reason  to  the  contrary,  the 
generally  recognized  share  value  of  $100  is  to  be  preferred 
and  selected. 

§  44.  Certificates  of  Stock. 

The  certificate  of  stock  is  merely  a  convenient  evidence 
of  the  ownership  of  corporate  shares,  and  its  loss  or 
destruction  does  not  affect  such  ownership  in  any  way.  The 
loss  of  the  certificate  may  embarrass  the  stockholder  on 
occasion,  just  as  the  loss  of  a  deed  to  real  estate,  or  bill 
of  sale  to  other  property  might  be  embarrassing,  but  he 
could  still  collect  his  dividends,  attend  and  vote  at  stock- 
holders' meetings  and  generally  perform  his  functions  as 
a  stockholder  just  as  he  did  before  the  loss  of  his  certificate. 
If  he  wished  to  sell  or  otherwise  transfer  his  interest  in  the 
corporation,  his  certificate  would  probably  have  to  be 
replaced  before  the  purchaser  or  transferee  would  con- 
sent to  take  over  the  stock.  Usually  the  corporate  by-laws 
provide  for  the  issue  of  a  new  certificate  in  case  of  loss 
or  destruction  of  one  already  issued.  The  matter  is,  how- 
ever, troublesome,  at  the  best,  generally  necessitating  the 
giving  of  a  bond  or  other  guarantee  to  the  corporation, 
and  the  loss  of  certificates  is  to  be  avoided  if  possible. 
(See  By-Law  provisions,  "  Lost  Certificates,"  in  Forms  9 
and  10.) 

It  is  to  be  noted  that  the  certificate  of  stock  is  purely  a 
matter  of  form  and  convenience,  that  the  ownership  of 
stock  may,  and  in  most  corporations  does  exist,  before  any 
certificates  are  issued,  and  that  it  would  be  entirely  pos- 
sible to  conduct  a  corporation — with  the  consent  of  its 
stockholders — without  the  issue  of  certificates  at  all,  the 
stock  books  of  the  corporation  then  being  the  sole  evidence 
of  stock  ownership. 


THE   STOCK   SYSTEM.  65 

Stockholders  are,  however,  entitled  to  certificates 
evidencing  the  stock  owned  by  them  and  can  force  the 
issue  of  such  certificates  if  withheld.  This  right  must, 
however,  be  exercised  within  proper  limits.  Stockholders 
are  not  thereby  authorized  to  make  nuisances  of  themselves 
and  harass  the  secretary  by  unreasonable  exactions  such 
as  excessive  transfers,  or  demands  for  large  numbers  of 
small  certificates,  or  for  issues  of  fractional  parts  of  a  share. 
To  curb  the  tendency  in  this  direction,  the  secretary  is  some- 
times empowered  by  the  by-laws  to  charge  a  small  fee  for 
each  certificate  issued  by  him.  This  is  legally  permissible 
and  is  usually  sufficient.  (Giesen  vs.  London  &  Northwest 
Mortgage  Co.,  102  Fed.  Rep.  584,  1900.)  (See  §  133.) 

§  45.  Unissued  Stock. 

A  corporation  is  empowered  by  its  charter  to  issue  stock  up 
to  the  full  amount  of  its  authorized  capital  stock.  At  the  time 
the  charter  is  allowed  all  this  stock  is  unissued.  Thereafter 
it  may  be  issued,  in  whole  or  in  part,  at  the  discretion  of  the 
corporation  or  as  required  by  its  operations.  The  unissued 
stock,  no  matter  whether  it  be  the  whole  capital  stock,  or  only 
a  reserved  portion  thereof,  represents  nothing  whatever  beyond 
the  potential  right  of  issue.  It  has  no  intrinsic  value.  It  is 
merely  the  right — granted  by  the  state — to  issue  stock  up  to 
the  prescribed  amount. 

This  being  so,  the  unissued  stock  cannot  in  any  way  be 
regarded  as  an  asset  of  the  corporation.  If  sold  it  brings  in 
cash,  property  or  other  values  that  have  a  greater  or  less  intrin- 
sic worth,  but  the  outgoing  stock  carries  with  it  an  interest  in 
the  corporate  property  that  should  .equal  the  value  received  for 
such  stock.  The  general  corporate  property  has  been  increased, 
but  the  ownership  thereof  has  likewise  been  increased  in  the 
same  proportion.  In  bookkeeping  parlance,  the  increase  of 
assets  and  liabilities  is  exactly  equal.  The  unissued  stock 
therefore  represents  nothing  more  than  the  right  to  admit  new 
members,  or  stockholders,  into  the  corporation,  upon  payment 


66  STOCK    AND    STOCKHOLDERS. 

of  the  proper  quid  pro  quo.  To  regard  it  as  an  asset  would 
be  as  illogical  as  to  consider  the  right  to  admit  new  partners 
in  a  firm  an  asset  of  the  partnership.  (See  §  64.) 

§  46.  Issued  Stock. 

•v 

Stock  is  always  supposed  to  be  issued  at  its  face  or  par 
\  alue  for  cash  or  other  actual  values.  At  the  time  of  organiza- 
tion, therefore,  the  face  value  of  the  stock  issued — if  full 
paid — would,  theoretically,  -equal  the  actual  value  of  the  cor- 
porate assets.  Even  if  this  be  true  in  fact,  these  values  may, 
and  generally  do,  vary  widely  thereafter.  If  the  corporation 
is  successful,  its  assets  may  increase  far  beyond  the  nominal 
value  of  its  issued  stock,  while  if  unsuccessful,  these  assets  will 
probably  fall  far  below  the  total  face  value  of  the  issued  stock. 
That  is,  the  value  of  such  stocks  as  shown  by  the  books  of  the 
corporation  will  be  far  above  or  below  the  par  value.  The  sell- 
ing price  may,  and,  depending  largely  upon  the  rate  of  divi- 
dends maintained  and  the  general  desirability  of  the  stock, 
probably  will  be  at  a  still  different  figure. 

A  corporation  may  by  purchase,  gift  or  otherwise  regain 
its  issued  stock.  Such  stock  coming  back  into  the  possession 
of  the  corporation  is  not  thereby  retired,  or  classed  as  unissued 
stock,  but  is  designated  as  treasury  stock,  may  be  issued  when 
desirable  and  is  usually  regarded  as  an  asset.  (See  Chap.  X, 
Treasury  Stock.) 

§  47.  Full-Paid  Stock. 

In  the  absence  of  statute  laws  to  the  contrary,  stock  may 
be  issued  on  any  basis  that  the  directors — with  the  assent  of 
the  stockholders — deem  best.  That  is  it  may  be  issued  for  its 
full  face  value  in  money  or  property,  or  it  may  be  issued  for 
only  a  portion  of  its  face  value,  or  may  be  issued  on  a  promise 
to  pay,  or  on  partial  payments,  or  on  no  payment  at  all  as  a 
free  gift.  If,  however,  it  is  not  paid  for  at  its  full  face  value 
in  money,  property  or  services — where  payment  is  allowed  by 
services — it  is  not  full-paid  stock,  and  therefore  carries  a  lia- 


THE    STOCK    SYSTEM.  67 

bility  for  the  amount  still  unpaid.     (See  Chap.  IX,  Full-Paid 
Stock.) 

The  term  "  watered  stock  "  is  merely  a  convenient  designa- 
tion for  stock  issued  in  excess  of  the  values  behind  it.  (See 
§§  60  and  61.) 

§  48.  Common  and  Preferred  Stock. 

Preferred  stock  is  that  to  which  some  preference  has  been 
given  over  other  stock  of  the  same  corporation  as  to  partici- 
pation in  profits,  and  often  in  assets  in  case  of  liquidation.  If 
there  is  no  distinction  in  regard  to  these  two  features  the  stock 
of  a  corporation  is  all  common  stock. 

Different  preferred  stocks  may  be  issued  by  the  same  cor- 
poration in  any  desired  variety  of  preference  as  to  dividends 
and  redemption  or  liquidation  rights.  These  would  be  distin- 
guished from  each  other  as  first,  second  and  third  preferred 
stock,  or  by  other  designations  descriptive  of  the  peculiar 
status  of  each  stock.  The  lowest,  or  non-preferred,  stock 
would  be  common  stock. 

§  49.  Other  Classifications. 

As  stated,  the  capital  stock  of  a  corporation  may  be  divided 
into  common  and  preferred  stock  on  the  basis  of  its  relation  to 
the  corporate  profits  or  property.  Stock  may  also  be  classified 
in  other  ways.  Most  of  these  other  classifications  relate  to 
the  voting  right.  The  simplest  is  a  division  of  the  stock  into 
two  classes,  one  class  voting,  the  other  not  exercising  this  right. 
For  instance  in  the  incorporation  of  a  partnership  where  one  or 
more  take  the  active  management,  others  merely  supplying  the 
capital,  the  active  partners  might  have  their  interests  repre- 
sented by  voting  stock  and  the  interest  of  the  silent  partners 
represented  by  non-voting  stock.  (See  Chap.  XXXVIII, 
Incorporating  a  Partnership.) 

Other  classifications  are  possible  in  considerable  variety, 
and,  generally,  it  may  be  said  that  any  desired  classification  is 
allowable  that  is  not  repugnant  to  equity,  to  the  common  law, 


68  STOCK    AND   STOCKHOLDERS. 

or  to  the  statute  law  of  the  state  under  which  the  corporation 
is  organized.  On  the  other  hand  it  may  be  said  that  such 
classifications,  unless  clearly  demanded  by  the  conditions,  are 
not  to  be  recommended.  They  may  work  unexpected  hard- 
ships, are  at  times  very  uncertain  in  their  actions,  and  introduce 
undesirable  complexities  into  the  corporate  mechanism. 

Classifications  of  stock  may  be  authorized  either  by  charter 
or  by-law  provisions.  As  a  matter  of  prudence  they  should 
be  incorporated  in  the  charter  where  possible.  The  specifica- 
tions relating  to  any  class  of  stock — except  unmodified  com- 
mon stock — should  be  printed  in  full  on  the  face  of  each  certifi- 
cate by  which  such  stock  is  represented.  (See  §§  98,  232,  239 
and  252;  also  Forms  29,  30.) 


CHAPTER  VIII. 
PREFERRED    STOCK. 


§  50.  General. 

Preferred  stock  is  that  which  has  some  preference  as  to 
dividends  or  assets  over  other  stock  of  the  same  corporation. 
This  preference  is  usually  given  to  make  such  stock  safer  or 
more  attractive,  though  at  times  its  purpose  is  to  limit  divi- 
dends or  gain  some  other  desired  end.  " 

The  use  of  preferred  stock  is  general.  It  is  perhaps  most 
commonly  employed  where  money  is  to  be  raised  for  the  de- 
velopment or  operation  of  a  corporate  enterprise.  For  this 
purpose  it  may  be  made  to  offer  greater  safety  both  as  to  prin- 
cipal and  dividends  than  common  stock,  while  it  does  not  carry 
the  dangerous  foreclosure  privilege  of  the  bond. 

When  a  business  is  incorporated,  preferred  stock  is  fre- 
quently issued  to  represent  or  pay  for  the  actual  property  as- 
sets, the  good-will  and  other  intangible  assets  being  represented 
by  an  issue  of  common  stock.  When  a  partnership  is  incorpo- 
rated, the  excess  investment  of  one  partner  is  very  often  repre- 
sented or  satisfied  by  an  issue  of  non-voting  preferred  stock, 
while  the  interests  of  a  silent  partner  may  be  conveniently 
cared  for  by  the  same  means.  Where  an  invention  or  other 
property  is  taken  over  and  payment  made  in  stock,  the  trans- 
ferrer,  on  account  of  its  greater  safety,  will  frequently  demand 
a  portion  or  the  whole  of  his  price  in  preferred  stock,  and,  gen- 
erally, the  device  will  be  found  most  useful  in  effecting  the 
adjustments  and  allowances  so  frequently  necessary  in  incorpo- 
rating. 

Usually  preferred  stock  is  created  by  charter  provision,  the 
preferences  and  restrictions  being  set  forth  at  length.  In  many 


70  STOCK    AND    STOCKHOLDERS. 

states  it  may  be  authorized  by  proper  by-law  provisions,  but  it 
is  always  better  and  safer  to  provide  for  it  in  the  charter. 

After  incorporation,  unless  otherwise  provided  by  statute, 
the  assent  of  every  stockholder  is  required  for  the  issue  of  pre- 
ferred stock.  This  is  reasonable,  as  the  value  of  the  common 
stock  may  be  depreciated  by  such  an  issue.  In  many  states 
the  statutes  allow  preferred  stock  to  be  issued  after  incor- 
poration when  authorized  by  a  prescribed  majority  of  the  out- 
standing stock.  (Hinckley.zAS-.  S.  &  S.  Co.,  107  App.  Div., 
N.  Y.,  470,  1905.) 

Preferred  stock  is  issued  in  many  different  forms  and  with 
many  different  classifications,  privileges  and  restrictions.  The 
possible  range  is  wide  and  includes  almost  any  desired  attribute 
not  contrary  to  law  or  public  policy.  All  the  conditions  of  any 
particular  issue  should  appear  upon  the  face  of  the  certificate 
by  which  such  preferred  stock  is  represented.  If  the  specifica- 
tions are  too  voluminous  for  this,  the  fact  that  the  certificate 
represents  preferred  stock  should  appear  plainly  on  its  face, 
together  with  a  reference  to  the  provisions  of  the  charter  by 
which  such  stock  is  authorized.  Such  notice  is  sufficient  to 
put  any  intending  purchaser  on  his  guard,  and  if  he  purchases 
the  stock  he  cannot  afterward  assert  ignorance  of  its  conditions 
as  a  basis  for  litigation  or  claims  against  the  corporation. 

Unless  specifically  prohibited  therefrom  by  proper  provi- 
sion in  the  charter,  by-laws  or  other  authorization  under  which 
such  stock  is  issued,  preferred  stock  carries  the  right  to  vote, 
and  the  right  to  participate  in  dividends  beyond  the  preferen- 
tial dividend  after  the  common  stock  has  received  a  dividend 
equal  thereto.  That  is  in  any  year,  if  the  preferred  dividend 
is  paid  and  the  common  stock  has  received  a  dividend  equal  in 
amount  to  this  preferential  dividend,  then  any  further  dividends 
belong  to  and  must  be  paid  to  all  the  stock,  common  and  pre- 
ferred alike.  Preferred  stock  would  have  no  preference  over 
common  stock  in  the  distribution  of  assets  in  case  of  liquidation 
or  dissolution,  unless  such  preference  were  specifically  given  by 
statute  or  set  forth  in  the  authorizing  provisions. 


PREFERRED    STOCK.  71 

Preferred  stock  differs  from  a  bond  issue  in  the  very  mate- 
rial point  that  interest  on  bonds  must  be  paid  when  due  and 
can  be  enforced  by  a  foreclosure  suit,  while  dividends  on  pre- 
ferred stock  are  only  payable  from  net  profits,  and  if  profits  are 
not  made,  are  not  due  and  therefore  cannot  be  collected.  Also, 
bonds  must  be  paid  on  maturity,  while  preferred  stock  has  no 
fixed  due  date.  For  these  reasons  the  issue  of  preferred  stock 
is  much  safer  for  the  ordinary  corporation  than  the  issue  of 
bonds.  Bondholders  are  creditors  of  the  company.  The 
holders  of  preferred  stock  are  not  creditors  of  the  company, 
have  no  claim  against  the  company  except  for  dividends  when 
declared,  and  have  no  rights,  save  for  their  preferences,  supe- 
rior to  those  of  the  common  stockholders.  Preferred  stock  is 
much  favored  in  the  formation  of  industrial  trusts.  (See 
Chap.  XL,  Industrial  Combination.) 

In  many  states  there  are  statutory  provisions  relating  to 
preferred  stock  which  must  be  consulted  when  the  subject  is 
under  consideration,  these  statute  laws  taking  precedence  of 
the  general  or  common  law  herein  set  forth.  Statutory  author- 
ization for  the  issue  of  preferred  stock  is  not  necessary.  (See 
Kent  vs.  Quicksilver  Mining  Co.,  78  N.  Y.,  159,  1879;  Rob- 
erts vs.  Robert-Wicks  Co.,  184  N.  Y.,  257,  1906.) 
§  51.  Preference  as  to  Dividends. 

The  following  extract  gives  a  common  form  of  charter 
provision  authorizing  the  issue  of  a  simple  preferred  stock : 

"  Of  said  capital  stock,  five  hundred  shares  of  the 
par  value  of  fifty  thousand  dollars  shall  be  preferred 
stock,  entitled  to  receive  from  the  net  earnings  of  the 
company  an  annual  dividend  of  six  per  cent,  before  any 
dividends  are  paid  upon  the  common  stock." 

The  holder  of  a  preferred  stock,  such  as  provided  in  the 
paragraph  quoted,  would  have  the  same  voting  right  as  the 
holder  of  common  stock,  his  dividends,  although  this  is  not 
specifically  stated  in  the  creating  clause,  would  be  cumulative 
and  he  would  participate  in  any  general  dividends  in  excess  of 
the  preferential  dividend  already  received.  In  case  of  liquida- 


72  STOCK    AND    STOCKHOLDERS. 

tion  of  the  corporation  he  would  in  most  states  have  no  claim 
to  preference  in  the  distribution  of  assets. 

Preference  as  to  dividends  may  be  as  to  amount,  as  in  the 
creating  clause  given,  or  as  to  profits  from  certain  sources,  as 
where  a  preferred  stock  is  to  receive  all  the  profits  of  a  certain 
plant  or  a  particular  branch  of  the  business. 

The  usual  rate  of  dividend  on  preferred  stock  ranges  from 
five  to  seven  per  cent.,  though  but  few  reliable  stocks  bear  this 
latter  rate.  In  some  states  the  rate  is  limited  to  a  maximum 
of  eight  per  cent. 

§  52.  Preference  as  to  Assets. 

Unless  otherwise  specifically  provided,  preferred  stock 
participates  in  any  distribution  of  assets  upon  the  liquida- 
tion of  the  corporate  property  just  as  common  stock  does 
but  has  no  preference  of  any  kind.  Some  preference  in  this 
respect  is  usual,  the  customary  arrangement  requiring  the 
payment  of  the  par  value  of  preferred  stock  with  all  arrear- 
ages of  dividends  before  anything  is  paid  upon  the  com- 
mon stock.  In  New  Jersey  such  provision  would  not  be 
necessary  as  the  preferred  stock  carries  this  right  under 
the  statute  law,  but  even  there  it  would  be  better  incor- 
porated in  the  charter  to  prevent  any  mistake  or  misappre- 
hension as  to  the  status  of  the  stock. 

§  53-  Cumulative  Dividends. 

Preferred  stock  may  be  cumulative  or  non-cumulative. 
If  the  former,  its  dividends  are  not  payable  if  not  earned, 
but  when  profits  are  earned  its  unpaid  dividends,  past  or 
present,  are  a  first  charge  against  such  profits,  and  must 
be  paid  before  the  common  stock  receives  anything.  If 
preferred  stock  is  non-cumulative,  a  passed  dividend  is  lost 
and  is  not  a  charge  against  the  company  in  any  way. 
Usually  a  non-cumulative  preferred  stock  is  not  a  desirable 
holding.  Its  existence  is  a  standing  inducement  to  the 
improper  passing  of  dividends.  The  courts  sometimes 
interfere  on  behalf  of  the  holders  of  non-cumulative  stock 


PREFERRED    STOCK.  73 

where  profits  have  been  made  and  the  directors  unjustly 
refuse  to  pay  dividends. 

It  is  to  be  noted  that  if  the  preferential  dividend  is  to 
be  non-cumulative,  this  fact  must  be  clearly  expressed  in  the 
charter  provisions  by  which  the  stock  is  authorized.  Where 
not  so  expressed  the  courts  have  held  the  preferential  div- 
idends to  be  cumulative  and  payable  in  full  out  of  the  first 
profits  before  anything  is  received  by  the  common  stock. 
(See  Boardman  vs.  Lake  Shore  etc.,  R.  R.,  84  N.  Y.  157, 
1 88 1.)  The  cumulative  feature  of  preferred  stock  is,  how- 
ever, for  the  sake  of  security  and  definiteness  usually 
covered  by  express  provision. 

Preferred  stock  bearing  cumulative  dividends  is  some- 
times called  "  guaranteed  stock  "  but  the  term  is  not  well 
applied,  being  used  with  greater  propriety  to  describe  stock 
upon  which  the  dividends  are  guaranteed  by  some  other 
corporation.  This  latter  form  of  stock  is  a  not  uncommon 
expedient  in  arranging  the  terms  of  railroad  combinations 
and  the  employment  of  the  term  "  guaranteed  stock  "  in 
that  connection  is  the  more  customary  as  well  as  the  better 
use. 

§  54.  Participation  in  General  Dividends. 

As  already  stated,  unless  otherwise  expressly  provided, 
preferred  stock  participates  equally  with  the  common  stock 
in  all  dividends  after  both  common  and  preferred  have 
received  an  equal  dividend.  That  is,  if  the  preferred  stock 
has  received  its  preferential  dividend  of,  say  six  per  cent, 
together  with  any  cumulated  arrearages,  it  participates  no 
further  in  dividends  until  six  per  cent,  has  been  paid  upon 
the  common  stock  as  well,  but  thereafter  both  classes  of 
stock  stand  upon  exactly  the  same  basis  as  to  any  further 
dividends  declared  during  that  year.  If  such  further  par- 
ticipation on  the  part  of  the  preferred  stock  is  not  desired, 
ifc  must  be  expressly  denied. 

Such    participation    privilege    beyond    the    preferential 


74  STOCK    AND    STOCKHOLDERS. 

dividend  is  not  common.  It  is  sometimes  employed  to 
advantage  in  the  adjustment  of  interests  among  incorpo- 
rating parties,  but  is  usually  only  found  where  the  stock  must 
be  made  attractive  above  the  common,  as  in  a  speculative 
corporation  where  the  risks  are  extra-hazardous,  or  under 
other  conditions  necessitating  unusual  inducements  to 
investors. 

The  same  ends  are  sometimes  attained  by  the  use  of  pre- 
ferred stock  limited  to  its  preferential  dividend,  but  accom- 
panied by  a  common  stock  bonus  of  equal  amount.  This 
plan  is,  however,  much  less  advantageous  than  the  use  of 
participating  preferred  stock,  as  it  involves  (i)  the  payment 
of  additional  dividends  on  stock  equal  in  amount  to  the 
preferred  stock,  (2)  an  additional  voting  right  in  the  man- 
agement, (3)  in  event  of  liquidation  a  double  claim  against 
the  assets.  That  is  one  share  of  participating,  non-voting, 
six  per  cent,  preferred  stock  of  the  par  value  of  $100  would, 
if  eight  per  cent,  dividends  were  paid  annually,  receive  $8 
dividends  yearly,  would  not  participate  in  the  management 
at  all,  and,  on  liquidation,  would  have  only  its  own  claim 
against  the  assets.  If  instead  the  preferred  stock  were  non- 
participating,  but  were  accompanied  by  a  bonus  of  one 
share  of  common  stock,  also  of  the  par  value  of  $100,  the 
two  would  receive  $14  in  dividends  yearly,  would  have  one 
vote  in  the  management,  and,  on  liquidation  would  have  a 
double  claim  against  the  assets. 

Where  a  participating  preferred  stock  is  issued,  to  avoid 
misunderstanding,  a  distinct  provision  in  the  authorization 
should  cover  such  participation. 

§  55.  Redemption  Right. 

Preferred  stock  is  often  issued  with  the  proviso  that  after 
a  certain  period,  and  after  specified  notice,  the  corporation  shall 
have  the  right  to  buy  in,  or  redeem,  its  outstanding  preferred 
stock  at  some  previously  designated  price. 

The  New  Jersey  statutes  give  the  right  to  provide  for  re- 


PREFERRED    STOCK.  75 

demption  of  preferred  stock  at  any  time  after  three  years  from 
the  date  of  issue.  In  New  York  there  is  no  statutory  provi- 
sion as  to  such  redemption,  but  in  the  absence  of  any  prohibi- 
tion the  redemption  of  preferred  stock  under  suitable  condi- 
tions would  seem  to  be  entirely  within  the  power  of  the  cor- 
poration, and  this  is  true  in  any  state.  (See  Citation  in  §  98.) 

It  is  to  be  noted,  however,  that  under  no  circumstances 
would  the  corporation  have  the  right  to  redeem  preferred  stock 
when  by  so  doing  it  would  impair  its  capital  stock  or  affect  the 
rights  of  creditors.  For  this  reason  such  redemption  should 
not  be  made  mandatory,  as  the  corporation  might  then  later 
find  itself  under  contract  obligation  to  do  an  illegal  act. 

The  redemption  right  is  sometimes  of  considerable  import- 
ance, and,  if  it  can  be  done  without  injury  to  the  sale  of  the 
preferred  stock,  should  be  retained.  Dividend  rates  on  preferred 
stock  are  usually  much  higher  than  interest  rates  on  borrowed 
money,  and,  if  the  corporation  accumulates  surplus  profits,  the 
preferred  stock  may  be  redeemed  and  its  high  preferred  divi- 
dends terminated,  with  much  advantage.  Usually,  if  the  pe- 
riod prior  to  the  operation  of  the  redemption  right  is  reasonably 
long,  and  the  redemption  premium  is  attractive,  this  privilege 
may  be  provided  without  detriment  to  the  salability  of  the 
stock  affected. 

The  redemption  price  of  preferred  stock  varies  with  the 
conditions.  Always,  as  a  pre-requisite,  the  payment  of  any 
accrued  dividends  is  involved.  Frequently  the  price  is  fixed 
at  the  par  value  of  the  stock  plus  one  year's  dividend.  At 
other  times  it  is  arbitrarily  placed  at  a  figure  thought  attractive, 
or  fair,  as  105,  no,  or  even  more  under  some  circumstances. 
Occasionally  the  holders  of  the  preferred  stock  will  be  given 
the  option  of  exchanging  their  stock  for  common  stock  instead 
of  taking  the  redemption  price. 

Preferred  stock  when  redeemed  is  no  longer  a  claim  against 
the  dividends  or  assets  of  the  company.  It  is,  however,  still 
a  part  of  the  capitalization  of  the  company,  and  might,  with  the 
assent  of  the  stockholders,  be  again  reissued. 


76  STOCK    AND    STOCKHOLDERS. 

§  56.  Voting  Rights. 

Unless  otherwise  expressly  provided,  preferred  stock- 
holders have  exactly  the  same  right  to  participate  in  corporate 
meetings  and  to  vote  upon  their  stock  as  do  the  holders  of  com- 
mon stock.  Usually,  however,  this  voting  right  and  the  right 
to  participate  in  stockholders'  meetings  is  denied  the  preferred 
stock,  the  power  of  management  being  reserved  to  the  common 
stock.  In  such  case  the  provisions  by  which  the  preferred 
stock  is  created  should  state  the  fact  of  its  non-voting  character 
with  clearness,  and  this  fact  should  also  appear  plainly  upon  the 
face  of  the  certificate  by  which  such  preferred  stock  is  repre- 
sented. Under  such  circumstances  the  preferred  stockholders 
have  no  more  to  do  with  the  management  of  the  corporation 
than  would  its  bondholders. 

A  variation  on  this  plan  of  absolute  non-representation  is 
to  provide  that  the  holders  of  preferred  stock  shall  not  vote 
so  long  as  the  preferential  dividends  are  paid  with  reasonable 
regularity,  but  that  if  such  preferential  dividends  shall  at  any 
time  fail,  for  say  two  consecutive  years,  then  the  holders  of 
preferred  stock  shall  thereafter  have  the  right  to  vote  in  all 
respects  as  do  the  holders  of  common  stock. 

This  plan  has  the  appearance  of  equity.  If  those  in  charge 
of  the  corporation  cannot  manage  the  corporate  business  so  as 
to  pay  dividends  on  even  the  preferred  stock,  it  would  seem 
but  reasonable  that  the  holders  of  preferred  stock,  who  suffer 
by  this  mismanagement,  should  be  allowed  a  voice  in  its  control. 
If  interest  is  not  paid  on  a  bond  issue,  foreclosure  results 
and  the  bondholders  not  infrequently  buy  in  and  conduct  the 
business.  Giving  the  preferred  stock  a  conditional  voice  in  the 
management  is  a  far  milder  application  of  the  same  principle. 

§  57.  Convertible  Stock. 

In  New  Jersey  by  a  statutory  enactment  of  recent  date,  cor- 
porations answering  to  certain  descriptive  conditions  are  al- 
lowed to  redeem  their  preferred  stock,  the  holders  consenting, 
with  bonds.  By  a  singular  coincidence,  the  United  States  Steel 


PREFERRED    STOCK.  77 

Corporation  was  found  to  be  within  the  descriptive  prescrip- 
tions, and,  with  the  consent  of  two-thirds  of  its  outstanding 
voting  stock,  it  offered  the  holders  of  its  seven  per  cent,  pre- 
ferred stock  the  privilege  of  exchanging  such  stock  for  five 
per  cent,  bonds.  The  exchange  was  entirely  optional  with  the 
holders  of  the  preferred  stock,  but  the  measure  aroused  bitter 
opposition  and  litigation.  The  exchange  was  finally  upheld. 
In  the  absence  of  permitting  statutory  provisions,  any  such 
exchange  or  arrangement  for  such  exchange  would  be  illegal. 

§  58.  Founders'  Shares. 

In  England,  founders'  shares,  a  kind  of  preferred  stock 
which  may  be  described  as  a  privileged  deferred  stock,  are  fre- 
quently issued.  To  illustrate,  a  corporation  capitalized  at 
$300,000,  with  $100,000  of  this  as  preferred  stock  and  $200,- 
ooo  as  common  stock,  might  have  $25,000  of  common  stock 
set  aside  as  founders'  shares,  with  perhaps  dividend  rights 
equal  to  all  the  other  common  stock.  That  is,  under  the  sup- 
posed arrangement,  after  the  preferred  stock  had  received  its 
dividend,  any  further  dividends  would  be  divided  into  two 
equal  parts,  one  of  which  would  go  to  the  ordinary  common 
stock;  the  other  to  the  founders'  shares.  In  other  words,  the 
$25,000  of  founders'  shares  would  equal  $175,000  of  the  ordi- 
nary shares  as  far  as  participation  in  dividends  was  concerned. 

Under  this  arrangement  the  founders'  shares  might  have  a 
very  high  value,  many  times  in  excess  of  that  of  the  common 
stock.  Where  employed,  such  shares  are  usually  reserved  as 
an  emolument  for  the  promoters  of  the  enterprise,  or  as  com- 
pensation to  men  of  eminence  or  financial  repute  for  the  use  of 
their  names. 

It  is  supposed  that  under  the  New  Jersey  laws,  and  under 
the  laws  of  some  other  states,  these  founders'  shares  might  be 
legally  issued.  Some  few  companies  have  been  organized  upon 
this  basis,  but  it  does  not  appear  that  the  subject  has  ever  come 
up  for  adjudication  in  this  country,  and  it  is  not  certain  what 
view  might  be  taken  of  the  matter  by  the  courts.  Probably, 


78  STOCK    AND  STOCKHOLDERS. 

if  accomplished  by  proper  charter  provisions,  and  with  the  full 
knowledge  of  the  stockholders  generally,  and  with  all  due  pub- 
licity, the  arrangement  would  stand.  As  everything  to  be  se- 
cured by  the  use  of  the  founders'  shares  can,  however,  be  ac- 
complished by  the  skilful,  but  recognized  and  adjudicated  use 
of  common  and  preferred  stock,  it  would  hardly  seem  wise  to 
venture  on  ground  that  is,  at  the  best,  experimental  and  of 
doubtful  utility. 


CHAPTER  IX. 
FULL-PAID   STOCK. 


§  59.  General. 

Under  the  common  law  stock  might  be  issued  at  any 
price  deemed  proper  by  the  parties  to  the  transaction,  and, 
in  the  absence  of  fraud,  such  sale  was  valid  and  final.  Now, 
however,  subscribers  to  stock  on  its  original  issue  must 
pay  its  par,  or  nominal  value,  under  penalty  of  possible 
liability  to  the  corporation  or  its  creditors  for  the  amount 
necessary  to  make  up  the  full  face  value  of  any  stock  issued 
for  less. 

In  most  states  full-paid  stock  carries  no  liability,  either 
in  favor  of  the  issuing  corporation,  or  of  the  creditors  of 
that  corporation.  (See  §  62.) 

§  60.  Watered  Stock. 

Stock  issued  as  full-paid  when  the  corporation  has  in 
fact  received  nothing  for  such  stock,  or  but  a  portion  of  its 
par  value,  is  commonly  termed  "  watered  stock."  It  is  also 
sometimes  called  "  fictitiously  paid  stock  "  and  many  states 
explicitly  prohibit  its  issuance  by  statute.  Watered  stock 
may  be  created  by  the  issue  of  stock  as  a  stock  dividend 
without  sufficient  increase  of  the  corporate  property  to 
support  additional  stock,  by  its  issuance  as  a  bonus  with 
preferred  stock  or  bonds,  or,  as  is  the  method  in  the  great 
majority  of  cases,  by  its  issuance  for  property  or  services 
at  an  over-valuation. 

The  most  obvious  form  of  watered  stock  is  that 
occasionally  issued  by  the  large  public  utility  corporations 
as  a  stock  dividend.  In  such  cases  there  is  usually  no 

79 


80  STOCK    AND    STOCKHOLDERS. 

pretense  of  any  increased  value  in  the  property  behind  the 
stock  and  its  issue  is  justified  only  by  the  ability  of  that 
property  to  pay  dividends  upon  the  increased  capitalization. 
If  the  corporation  were  forced  into  liquidation,  the  stock 
would  receive  only  a  fraction  of  its  face  value.  Such  a  stock 
dividend  must  be  distinguished  from  a  stock  dividend  paid 
in  lieu  of  cash  dividends  of  equal  amount,  where  the  reserved 
cash  is  added  to  the  working  capital  of  the  company,  and  the 
issued  stock  therefor  represents  actually  increased  values, 
capable  of  realization  in  event  of  the  liquidation  of  the 
company. 

The  most  common  form  of  watered  stock  is  that  issued 
in  the  purchase  of  property  at  an  over-valuation.  Such 
stock  is  nominally  full-paid  and  in  some  cases  by  the  sub- 
sequent prosperity  of  the  corporation,  the  anticipations  of 
its  promoters  are  realized  and  the  stock  is  removed  from 
the  category  of  watered  stock.  In  the  majority  of  cases, 
however,  the  corporations  do  not  meet  the  expectations 
of  their  organizers,  and  the  issued  stock  is  left  with  but 
little  support.  In  such  case,  if  the  undertaking  is  of  suf- 
ficient value  in  actual  property  or  in  possible  profits  to 
justify  the  step,  a  re-organization  takes  place,  the  capital 
stock  is  greatly  reduced,  thereby  "  squeezing  the  water  out 
of  it,"  and  the  corporation  is  placed  on  a  decreased,  but 
usually,  much  sounder  basis. 

§  61.  Legal  Status  of  Watered  Stock. 

Stock  issued  at  less  than  its  full  face  value  without 
agreement  between  the  parties  thereto  as  to  the  nature  of 
such  stock,  is  partly-paid  stock,  and  the  purchaser  is  liable 
to  the  corporation,  or,  in  event  of  the  insolvency  of  the 
corporation  to  its  creditors  for  the  amount  necessary  to 
make  up  the  full  face  value  of  such  stock.  If,  however,  it 
is  agreed  between  the  purchaser  and  the  corporation  that 
the  price  paid  shall  be  in  full  settlement  of  the  claims  of  the 
corporation  against  such  stock,  then  as  between  the  parties 


FULL-PAID    STOCK.  81 

the  stock  is  full-paid,  and,  in  the  absence  of  fraud,  the 
holder  is  under  no  liability  to  the  corporation.  (Scovill 
vs.  Thayer,  105  U.  S.,  143,  1881.) 

This  is  true  as  to  the  corporation  but  not  as  to  its 
subsequent  creditors,  unless  by  agreement  of  these  latter, 
and,  in  event  of  the  insolvency  of  the  corporation,  these 
creditors  might  proceed  against  the  original  purchasers 
of  any  watered  or  partly-paid  stock  so  long  as  such  stock 
remained  in  their  hands,  and  collect  from  them  the  amount 
necessary  to  render  their  stock  full-paid. 

This  possible  liability  would  follow  the  unpaid  stock 
into  the  hands  of  transferees  purchasing  such  stock  with 
a  knowledge  of  its  character,  but  would  not  follow  it  into 
the  hands  of  an  innocent  purchaser  for  value.  (See  §  62.) 

It  is  to  be  noted  that  the  general  doctrine  as  stated 
requires  modification  in  those  cases  where  the  board  of 
directors  of  a  corporation  have  issued  stock  for  property 
or  services,  in  good  faith  and  without  fraud,  and  later 
developments  prove  the  consideration  to  have  been — or  to 
be — worth  less  than  the  face  value  of  the  stock.  In  such 
event,  in  most  states  of  the  Union,  the  courts  refuse  to  hold 
the  recipients  of  the  stock  liable  on  the  ground  of  failure 
or  insufficiency  of  the  consideration.  (See  Chap.  XXXII, 
Issuance  of  Stock  for  Property.) 

§  62.  Legal  Status  of  Full-Paid  Stock. 

Full-paid  stock  carries  no  liability  of  any  kind,  either  to 
the  corporation  or  its  creditors,  save  in  those  few  states 
where  by  statute  special  liabilities  have  been  created.  This 
freedom  from  liability,  no  matter  what  the  vicissitudes  of 
the  corporation,  gives  to  stock  its  desirability  as  a  form  of 
investment.  As  this  feature  pertains  only  to  full-paid  stock, 
it  is  a  great  object  in  the  organization  of  a  new  corporation 
to  render  its  stock  full-paid. 

Where  stock  is  issued  at  par  for  cash,  which  with  finan- 
cial institutions  is  usually  a  matter  of  statutory  obliga- 


82  STOCK    AND    STOCKHOLDERS. 

tion,  or  for  cash  and  substantial  property  to  the  actual 
face  value  of  the  stock  as  in  the  case  of  some  solid  business 
corporations,  the  question  does  not  arise.  The  ordinary 
corporation,  however,  cannot  as  a  rule  sell  its  stock  at  par, 
particularly  when  it  is  organized  for  the  development  of 
some  new  or  speculative  enterprise.  To  issue  such  stock 
direct  for  less  than  par  would  leave  the  purchasers — if  pur- 
chasers could  be  found — liable  for  the  difference.  Various 
expedients  are  then  utilized  to  render  this  stock  full-paid 
before  it  is  sold  to  the  actual  purchasers  for  cash,  and  the 
methods  adopted  to  secure  this  end  have  given  rise  to  most, 
if  not  all,  the  litigation  relating  to  the  full  payment  of  stock. 
(See  Chap.  XXXII,  Issuance  of  Stock  for  Property;  also 
Chap.  X,  Treasury  Stock.) 

§  63.  Certificates  for  Full-Paid  Stock. 

When  stock  is  full-paid  the  certificates  by  which  it  is  repre- 
sented usually  bear  upon  their  face  the  words  "  Full-Paid  and 
Non- Assessable."  There  is  no  legal  requirement  that  the  cer- 
tificates shall  be  so  inscribed,  but  if  they  were  not  the  pur- 
chasers would — and  very  properly — be  suspicious  of  the  stock. 
The  direct  and  legitimate  inference  from  the  omission  would 
be  that  such  stock  was  not  full-paid  and  non-assessable  and 
might  carry  latent  liabilities. 

On  the  other  hand,  where  certificates  are  marked  "  Full- 
Paid  and  Non- Assessable,"  such  stock  may  be  bought  with  full 
confidence  that  its  purchase  involves  no  unknown  liabilities. 
Even  should  it  later  prove  to  have  been  but  partly  paid,  or  not 
paid  at  all,  the  innocent  purchaser  for  value  could  not  be  held 
liable  on  that  account.  He  purchased  on  the  faith  of  the  un- 
questioned statement  on  the  stock  certificate  that  such  stock 
was  full-paid,  and,  as  far  as  he  is  concerned,  the  stock  will 
be  held  to  bear  that  character.  (Young  vs.  Erie  Iron  Co., 
6.5  Mich.,  in,  1887; Rood  vs.  Whorton,  67  Fed.  Rep.,  434, 
1895;  Sprague  ^.National  Bank  of  America,  172  111.,  142, 
1898.) 


FULL-PAID    STOCK.  83 

The  word  "  Non- Assessable  "  merely  indicates  that  the  cor- 
poration has  either  received  full  payment  of  the  stock  in  ques- 
tion, or  otherwise  that  it  has  relinquished  any  claim  it  might 
have  on  such  stock  for  further  payments  or  assessments  of  any 
kind.  Full-paid  stock  is  non-assessable  under  any  circum- 
stances except  in  California  and  some  few  other  states  where 
the  statutes  permit  the  corporation  to  levy  assessments. 

In  some  few  states  certificates  representing  stock  issued  for 
property  must  bear  the  legend  "  Issued  for  Property  "  or  some 
equivalent  statement.  Elsewhere,  this  is  neither  necessary  nor 
desirable.  Such  stock  is  of  no  different  nature  or  legal  status 
from  any  other  stock,  and  to  inscribe  it  in  the  manner  indi- 
cated conveys  the  impression  that  some  difference  actually  ex- 
ists. (See  Chap.  XXXII,  Issuance  of  Stock  for  Property.) 


CHAPTER  X. 
TREASURY   STOCK. 


§  64.  Definition. 

The  term  "  Treasury  Stock  "  is  employed  very  loosely  by 
business  men  and  accountants  to  describe  unissued  stock.  The 
better  use  of  the  expression  is  to  designate  the  "  Issued  and 
outstanding  stock  of  the  company  that  has  been  donated  to  or 
purchased  by  the  corporation  and  which  is  held  subject  to  dis- 
posal by  the  directors."  Such  stock  is  properly  treasury  stock, 
is  the  property  of  the  company,  and  would  be  entered  as  an 
asset  on  its  books. 

To  style  unissued  stock  "  treasury  stock  "  is  a  misnomer. 
Unissued  stock  is  merely  the  privilege  of  creating  a  liability. 
It  is  not  in  any  sense  of  the  word  an  asset.  For  $20  the  State 
of  Arizona  will  charter  a  corporation  and  authorize  it  to  issue 
stock  to  the  face  value  of  $25,000,000  or  more.  Such  a  com- 
pany on  organization  would  have  an  over-plentiful  supply  of 
unissued  stock,  but  no  assets  whatever.  The  absurdity  of  re- 
garding its  unissued  stock  as  an  asset  is  obvious.  (See  §  45.) 

Stock  that  has  been  once  legally  issued  for  full  value,  how- 
ever, is  of  a  very  different  nature.  It  is  then  full-paid  stock 
and  represents  a  certain  interest  in  the  corporate  property.  If 
any  of  it  comes  back  into  the  possession  of  the  company  it  is 
still  "  full-paid  stock,"  and  is  then  with  some  logical  correct- 
ness considered  an  asset.  Such  stock  is  properly  classified  as 
treasury  stock  and  may  be  sold  below  par  to  raise  funds  for  the 
operations  of  the  company,  may  be  given  away  as  a  bonus  with 
preferred  stock  or  bonds,  or  be  otherwise  used  without  involv- 
ing the  recipient  in  any  liability  to  creditors  of  the  corporation. 

84 


TREASURY    STOCK.  85 

§  65.  Origin. 

If  a  corporation  were  organized  upon  a  strictly  cash  basis, 
each  subscriber  paying  the  par  value  for  his  stock,  it  would 
have  no  treasury  stock  at  the  time  of  organization.  Later 
should  a  portion  of  this  issued  stock  come  back  into  the  posses- 
sion of  the  company  in  settlement  of  some  debt  or  through 
other  negotiation,  such  returned  stock  would  be  treasury  stock 
and  from  the  bookkeeping  standpoint  an  asset  of  the  company. 

When,  however,  as  is  so  frequently  the  case,  a  corporation 
is  organized  to  exploit  some  mine,  invention  or  other  enterprise, 
or  to  make  a  combination  of  existing  corporations,  it  would 
under  the  usual  plan,  issue  all  or  a  large  portion  of  its  stock 
in  payment  for  the  property  assigned  to  the  corporation.  This 
stock  is  thereby  rendered  full-paid.  Then  by  agreement,  or 
by  understanding,  the  recipient  of  this  stock  assigns  back  to 
the  corporation,  or  to  some  trustee  for  the  corporation,  a  pro- 
portion of  this  full-paid  stock  to  be  used  for  company  purposes. 
This  would  be  the  treasury  stock  of  the  company  and  in  the 
present  day  it  is  thus  as  a  general  rule  treasury  stock  is  ob- 
tained. Such  stock  is  usually  a  clear  donation,  the  disposition 
to  be  made  of  the  stock  being  sometimes  prescribed,  but  gen- 
erally left  to  the  discretion  of  the  board  of  directors  upon  whom 
its  disposal  devolves. 

§  66.  Transfers  to  Corporation. 

When  stock  is  thus  donated  or  otherwise  transferred  to  the 
corporation,  the  certificates  might  be  assigned  to  the  "  ...... 

Company  "  or  to  "  Treasurer  of  the 

Company/'  Such  stock  should  not  be  assigned  to  the  treasu- 
rer by  name,  that  is  to  "  John  Wilson,  Treasurer,"  as  at  a  sub- 
sequent election  the  position  of  treasurer  may  be  filled  by  some 
other  person,  and  the  too  definite  indorsement  may  then  cause 
trouble. 

A  plan  that  is  sometimes  pursued  when  stock  is  thus  turned 
over  for  the  benefit  of  the  company  is  to  assign  it  to  trustees, 


86  STOCK    AND    STOCKHOLDERS. 

to  hold  and  sell  such  stock  for  the  benefit  of  the  company, 
either  at  their  own  discretion,  or  under  the  superintendence  of 
the  directors,  the  funds  so  received  being  paid  over  to  the 
treasurer  of  the  corporation.  This  plan  relieves  the  corpora- 
tion of  all  responsibility  as  to  the  details  of  the  matter,  and, 
the  transaction  not  appearing  on  the  company's  books  until  the 
money  from  the  sale  of  the  stock  is  received,  the  bookkeeper  is 
relieved  from  some  perplexity  as  to  his  ledger  account  with 
treasury  stock. 

When  certificates  representing  treasury  stock  are  received 
by  the  corporation,  they  should  bear  the  proper  indorsements, 
and  would  then  usually  be  turned  over  to  the  secretary.  This 
official  would  enter  the  transfer  in  the  stock  book,  cancel  the 
old  certificates  and  return  them  to  the  stock  certificate  book, 
and,  if  desired,  issue  new  certificates  in  the  name  of  the  cor- 
poration or  of  the  official  by  whom  the  stock  is  to  be  held. 
It  is  to  be  noted  that  new  certificates  need  not  necessarily  be 
issued  at  all  until  sales  of  treasury  stock  are  made,  when  the 
certificates  representing  stock  sold  might  be  issued  directly  to 
the  purchasing  party.  In  such  case,  until  the  time  of  sale, 
the  stock  book,  in  connection  with  the  canceled  certificates  of 
the  stock  certificate  book,  would  be  the  sole  but  sufficient  evi- 
dence of  the  status  and  ownership  of  such  treasury  stock. 

§  67.  Transfers  from  Corporation. 

When  treasury  stock  is  sold  the  formalities  are  simple. 
The  sale  being  duly  authorized  by  the  directors,  the  treas- 
urer would,  if  the  stock  were  held  by  him  and  the  original 
certificates  had  been  canceled  without  reissue,  merely  give 
the  purchaser  an  order  for  the  required  certificates,  or 
instruct  the  secretary  in  writing  to  issue  such  new  certifi- 
cates. If  the  original  had  been  canceled  and  new  certifi- 
cates issued  to  the  treasurer,  this  latter  official  would  merely 
assign  one  of  his  certificates,  if  of  the  right  denomination. 
If  otherwise  he  would  have  one  broken  up,  the  proper 
number  of  shares  being  issued  therefrom  to  the  new  pur- 


TREASURY    STOCK.  87 

chaser  and  the  unsold  remainder  being  issued  to  the  treas- 
urer. If  the  certificates  had  been  held  in  the  name  of  the 
corporation,  the  treasurer  or  such  other  official  or  officials 
as  were  designated  by  the  board  would  make  the  proper 
assignments. 

§  68.  Legal  Status  of  Treasury  Stock. 

When  its  own  stock  is  held  by  the  corporation,  or  by 
trustees,  or  by  its  officers,  for  the  corporation,  such  stock, 
so  long  as  it  is  so  held,  is  inert  and  can  neither  vote  nor  par- 
ticipate in  dividends.  Should  the  stock  be  voted,  such 
action  would  be  illegal  and  any  action  or  election  decided 
by  the  vote  of  treasury  stock  would  also  be  illegal  and 
might  be  set  aside.  If  dividends  should  be  declared  and 
paid  upon  such  stock,  the  action  would  be  unauthorized  and 
would  also  be  meaningless  as  the  money  so  paid  would 
come  directly  back  into  the  treasury  of  the  corporation. 

§  69.  Stock  of  other  Corporations  held  in  Treasury. 

It  is  to  be  noted  that  the  comments  of  the  preceding 
section  do  not  in  any  way  apply  to  stock  of  other  corpora- 
tions which  may  be  owned  and  held  in  the  treasury  of 
any  particular  corporation.  Such  stock  would  be  personal 
property,  and  liable  to  taxation  as  such,  and  would  maintain 
all  its  corporate  rights  and  privileges  in  full  vigor.  It  would 
participate  to  the  full  in  any  dividends  declared  by  the  cor- 
poration from  which  it  issued,  and  would  be  entitled  to  full 
representation  and  voting  rights  at  any  stockholders' 
meeting  of  that  corporation.  Such  stock  would  be  voted, 
either  in  person  or  by  proxy,  by  the  trustee  or  official  in 
whose  name  it  was  held,  or  if  held  in  the  name  of  the  cor- 
poration by  such  person  as  was  formally  designated  thereto 
by  the  corporation.  Such  vote  would  be  cast  under  the 
general  instructions  of  the  board  of  directors,  but,  unless 
matters  of  much  importance  were  to  be  considered,  the 
details  of  his  representation  and  the  actual  vote  would 


88  STOCK    AND    STOCKHOLDERS. 

usually  be  left  to  the  discretion  of  the  person  who  rep- 
resented the  corporation. 

It  is  to  be  noted,  however,  that  a  corporation  cannot 
legally  hold  the  stock  of  another  corporation,  unless  specifi- 
cally authorized  by  statute  as  in  New  Jersey,  or  by  charter 
provision  allowable  under  the  statutes,  as  in  New  York. 
(See  Chap.  XXXIX,  Holding  Corporations.) 


CHAPTER  XL 
STATUS    OF    STOCKHOLDERS. 


§  70.  General. 

In  the  active  affairs  of  the  corporation  the  stockholders 
occupy  a  position  of  minor  importance.  They  own  the 
stock  of  the  corporation,  and  through  that  ownership,  the 
corporation  itself  with  all  its  belongings.  Their  control 
of  the  organization  and  their  management  of  its  affairs  is, 
however,  indirect  and  somewhat  removed.  The  business 
is  theirs  and  its  profits  belong  to  them  but  its  actual  man- 
agement and  the  general  control  of  the  corporation  are 
in  the  hands  of  the  directors,  with  whom  the  stockholders, 
either  individually  or  collectively,  cannot  directly  interfere. 

§  71.  Functions. 

The  functions  of  the  stockholders  are  few  and  simple. 
They  assemble  once  a  year  in  annual  meeting  to  listen  to 
reports,  elect  directors  and  discuss  the  general  affairs  of 
the  company.  On  rare  occasions  they  are  assembled  for 
particular  action  in  special  meeting.  If  the  charter  is  to  be 
amended,  they  are  usually  required  to  act.  If  all  the  assets 
of  the  corporation  are  to  be  sold,  they  are  generally  called 
upon  to  sanction  the  proceeding.  In  some  states  their  con- 
sent is  required  to  validate  corporate  mortgages.  They 
would  act  on  any  proposed  liquidation  of  the  corporation. 
By  charter  provisions,  their  consent  may  be  necessary  to 
other  proposed  action.  One  other  most  important  function 
pertains  to  the  stockholders;  the  right  to  make,  amend  and 
repeal  the  by-laws.  (See  generally  Part  IV,  By-Laws.) 

The  active  connection  of  the  stockholder  with  his  corpo- 
rations is,  under  normal  conditions,  limited  to  the  functions 

89 


90  STOCK    AND    STOCKHOLDERS. 

specified.  The  further  control  and  direction  of  the  corporate 
organization  and  its  property  and  business  are  left  entirely  to 
the  directors  he  has  elected. 

§  72.  Rights. 

As  a  matter  of  common  or  statutory  law  the  stockholder 
has  a  right  to  due  notification  of  all  stockholders'  meetings,  to 
participate  in  their  proceedings  and  to  vote  on  all  questions  sub- 
mitted thereto,  and  in  the  election  of  directors  in  the  manner 
and  to  the  extent  to  which  he  is  entitled  by  reason  of  his  stock- 
holdings. In  case  dividends  are  declared  he  is  entitled  to  re- 
ceive his  due  proportion.  He  is  also  entitled  to  purchase,  if  he 
so  desires,  his  due  proportion  of  any  increased  capital  stock. 

In  addition  to  these  rights,  he  is  entitled  to  the  honest  and 
capable  management  of  the  corporate  business  and  interests  and 
to  the  proper  disposition  of  the  profits  derived  therefrom. 

Rights  of  the  first  class  require  but  little  attention  from 
the  stockholder  beyond  due  provision  as  to  the  manner  and 
details  of  their  observance.  His  further  rights,  while  broadly 
secured  to  him  under  existing  laws,  are  more  immediately  and 
more  definitely  secured  to  him  by  care  in  the  selection  of  his 
agents,  the  corporate  directors,  and  by  the  proper  regulation 
and  restriction  of  these  agents  in  their  management  of  the  cor- 
porate affairs,  by  intelligently  drawn  by-laws.  It  may  be  said 
in  passing  that  the  selection  of  honest  and  capable  directors 
is  by  far  the  best  and  most  effective  means  of  safeguarding  the 
interests  of  the  stockholders. 

§  73.  Powers. 

Under  ordinary  conditions  the  stockholders  have,  as  a  mat- 
ter of  course,  full  power  and  freedom  in  the  selection  of  di- 
rectors, and,  it  is  to  be  presumed,  will  select  men  of  experience 
and  ability  in  the  line  of  the  corporate  affairs,  and  men  to  whom 
the  direction  of  these  affairs  may  be  safely  entrusted. 

Beyond  this,  the  stockholders  have  somewhat  broad  powers 
in  the  restriction  and  regulation  of  the  directors,  through  their 


STATUS    OF    STOCKHOLDERS.  91 

right  to  make,  amend  and  repeal  the  by-laws.  Such  regula- 
tion of  the  management  must,  as  a  general  rule,  be  secured  in 
the  inception  of  the  enterprise.  Thereafter  it  is  often  difficult 
and  at  times  impossible  to  secure  the  passage  of  the  necessary 
regulations. 

§  74.  Liabilities. 

The  liabilities  of  stockholders  as  such  are  few — usually 
only  to  pay  the  full  par  value  of  the  stock  subscribed  for  or 
purchased  by  them.  This  liability  on  unpaid  stock  may,  by 
agreement  of  the  issuing  corporation,  be  terminated  as  between 
the  corporation  and  its  stockholders  but  would  still  exist  as 
between  these  stockholders  and  creditors  of  the  corporation, 
and,  on  the  insolvency  of  the  corporation,  would  become  imme- 
diately effective.  (Dickerman  vs.  Northern  Trust  Co.,  176 
U.  S.,  181,  1900;  Thompson  vs.  Knight,  74  App.  Div.,  N.  Y., 
316,  1902.)  (See  Chap.  IX,  Full-Paid  Stock.) 

In  Minnesota  and  California  additional  liabilities  are  im- 
posed on  stockholders  by  statutory  enactments. 

§  75.  Relations  to  Directors. 

If  unrestricted  by  charter  or  by-law  provisions,  the  direct- 
ors' control  of  corporate  affairs  is  almost  absolute.  They  can- 
not be  interfered  with  or  restrained  so  long  as  they  exercise 
ordinary  care  and  honesty.  Even  if  they  fail  in  these  elemen- 
tary requirements,  the  stockholders'  remedy  is  indirect  and 
difficult. 

If  the  directors  manage  the  business  in  opposition  to  the 
wishes  of  the  stockholders,  the  latter  are  almost  helpless  The 
directors  are  not  amenable  to  request  or  resolutions,  cannot  be 
removed,  and  may  pursue  any  policy  they  deem  best  short  of 
actual  fraud  or  the  grossest  mismanagement. 

In  some  cases  the  stockholders  by  means  of  special  meetings 
and  the  by-laws  passed  thereat  may  exercise  a  certain  negative 
control  over  the  board,  but,  practically,  when  unrestricted  by 
charter  or  by-laws,  the  directors  are  independent  of  the  stock- 
holders as  to  the  management  of  corporate  affairs,  and  any 


92  STOCK    AND    STOCKHOLDERS. 

attention  they  pay  to  the  wishes  of  the  latter  is  a  matter  of 
courtesy  or  policy  or  propriety,  not  one  of  obligation. 

If  the  stockholders  do  not  wish  to  repose  such  absolute  con- 
trol of  the  corporate  affairs  in  the  board,  they  may  restrict  its 
power  to  some  extent  by  means  of  suitable  charter  and  by-law 
provisions.  Such  provisions  where,  permitted  are  best  incorpo- 
rated in  the  charter.  The  objection  to  such  provisions  in  the 
by-laws  is  the  comparative  ease  with  which  they  may  be 
changed.  By-law  provisions  are  quite  as  effective  so  long  as 
they  remain  in  force  as  similar  provisions  in  the  charter. 

If  a  majority  of  the  stockholders  are  agreed  as  to  what  is 
needed — more  particularly  in  the  inception  of  the  enterprise 
when  the  first  by-laws  are  being  formulated — their  power  to 
restrict  and  regulate  the  actions  and  authority  of  the  board  is 
quite  extended.  It  is  a  power,  however,  that  should  be  exer- 
cised with  discretion.  If  the  regulation  of  the  board  be  car- 
ried too  far,  its  freedom  of  action  will  be  hampered  to  the 
injury  of  the  business  and  it  will  be  difficult  to  secure  capable 
men  to  act  as  directors. 

The  best  guaranty  of  the  proper  conduct  of  the  corporate 
business  is  the  election  of  honest  and  capable  directors,  and  if 
such  be  secured,  their  regulation  and  restriction  is  a  matter  of 
minor  importance.  As  such  directors  are  not  always  available, 
and  as  mistakes  as  to  the  character  of  candidates  sometimes 
occur,  it  is  usually  advisable,  however,  to  impose  reasonable 
regulations  and  restrictions. 

Usually  the  restrictions  on  the  power  of  the  board  will  be 
in  the  direction  of  limitations  of  the  debt  incurring  power,  re- 
strictions as  to  salaries  to  be  paid  officials,  regulations  as  to 
payment  of  dividends  and  the  handling  and  disposition  of  the 
company's  finances,  and  provisions  for  the  regular  inspection 
and  auditing  of  the  corporate  books  and  records.  (See  gen- 
erally §§  116,  117,  236,  243.) 

The  stockholders'  regulations  might  be  extended  much  fur- 
ther than  this.  The  right  to  elect  officers  might  be  reserved 
by  the  stockholders,  the  board  might  be  made  amenable  to 


STATUS    OF    STOCKHOLDERS.  93 

stockholders'  resolutions,  and  the  right  to  remove  directors  on 
occasion  might  be  retained  by  the  stockholders  as  a  means  of 
enforcing  compliance  with  their  wishes. 

Measures  of  this  kind  are  extreme  and  of  questionable  ex- 
pediency. In  some  states  they  would  be  of  doubtful  legality, 
and  in  any  state  they  would  be  liable  to  introduce  unnecessary, 
and,  at  times,  embarrassing  complexities,  in  the  scheme  of 
corporate  organization.  They  are  not  found  in  the  best-man- 
aged and  most  successful  business  corporations  of  the  country. 


PART  IIL— THE  CHARTER, 


CHAPTER  XII. 
GENERAL  CONSIDERATIONS. 


§  76.  Nature  of  Charter.    . 

The  foundation  of  the  corporation  is  a  formal  written 
grant  or  authorization  from  the  state.  This  instrument 
was  originally  known  as  the  charter,  but  is  now  usually 
designated  by  the  statute  laws  of  the  various  states  as  the 
certificate  of  incorporation,  or  the  articles  of  association. 
From  a  legal  standpoint  there  is  no  distinction  between 
these  different  names.  As  a  matter  of  convenience  the 
term  charter  is  generally  employed  in  the  present  volume. 
The  charter  may  be  granted  by  a  particular  state,  or  by 
the  general  government,  as  in  the  case  of  national  banks 
and  certain  other  corporate  organizations. 

Formerly  every  charter  was  created,  or  authorized,  by 
a  separate  legislative  act.  Such  charters,  termed  special 
charters,  are  still  granted  in  some  states  by  act  of  legislature, 
but  the  greater  number  of  corporations  are  organized  under 
state  laws  of  general  application.  (See  §  82.) 

All  corporations  have  certain  common  law  powers,  such 
as  the  right  to  sue  and  be  sued  under  the  corporate  name, 
the  right  to  contract  and  to  use  the  corporate  seal.  In 
addition  they  have  any  general  powers  granted  by  the 
statutes  and  the  special  rights  granted  by  their  respective 
charters,  such  as  the  use  of  their  particular  name,  the  right 
to  carry  on  the  special  business  and  to  have  a  certain  capital 

94 


GENERAL    CONSIDERATIONS.  95 

stock.  They  also  have  such  incidental  powers  as  are  neces- 
sary to  render  these  express  powers  effective.  The  exercise 
of  any  further  powers,  privileges  or  limitations  would  be 
ultra  vires,  and  could  only  be  authorized  by  proper  amend- 
ment of  the  charter. 

As  the  charter  is  usually  a  very  formal  instrument,  and 
the  procedure  for  its  amendment  is  also  formal  and  usually 
troublesome,  it  is  important  that  all  desired  purposes  and 
powers  should  be  stated  with  clearness  and  fullness  in  the 
original  charter  application. 

The  powers  and  privileges  conferred  upon  a  corpora- 
tion by  its  charter  are  only  such  as  are  allowable  under  the 
laws  of  the  state  of  incorporation.  Ordinarily  any  pro- 
visions of  a  different  tenor  would  be  refused  or  stricken 
out  of  the  charter  application  by  the  state  officials. 
Occasionally  it  happens,  however,  through  official  ignorance, 
inadvertence  or  indifference,  that  powers  and  privileges 
illegal,  or  not  permissible,  are  passed  and  apparently  granted 
by  the  charter  of  a  corporation.  Such  appearance  is  decep- 
tive. The  corporation  is  empowered  by  its  charter  just  so 
far  as  that  instrument  is  in  accord  with  the  law  of  the  state 
and  no  further.  The  charter  is  not  and  cannot  be  superior 
to  the  law,  and  is  absolutely  ineffective  just  so  far  as  it 
goes  beyond.  (Eastern  P.  R.  Co.  vs.  Vaughan,  14  N.  Y.,  546, 
1856.) 
§  77.  Classification. 

Charters  are  divided  into  two  important  classes  by  the 
general  division  of  corporations  into  stock  and  non-stock, 
or  membership  corporations.  Charters  for  membership 
corporations  are  much  simpler  than  those  for  the  ordinary 
stock  corporation,  and  as  all  that  pertains  to  them  is 
included  in  the  law  relating  to  stock  corporations,  they 
are  not  treated  specifically  in  the  present  volume. 

Beyond  this  general  division,  stock  corporations  and  the 
charters  creating  them  may  be  divided  into  three  important 
classes. 


96  THE    CHARTER. 

First,  business  corporations  organized  to  conduct  an  ordi- 
nary mining,  mercantile,  manufacturing  or  other  private 
business. 

Second,  public  utility  corporations,  organized  to  under- 
take some  public  function,  such  as  the  supply  of  heat,  light, 
power  or  water,  or  the  construction  or  operation  of  a  rail- 
way, a  telephone  or  telegraph  system. 

Third,  financial  corporations,  as  banks,  trust  companies, 
building  associations  and  insurance  companies. 

The  corporations  of  each  of  these  classes  are  created  by 
charters  differing  from  those  of  the  other  classes  in  form 
and  terms,  though  all  conform  to  the  general  principles 
governing  charters. 

§  78.  Business  Corporations. 

This  term  is  used  to  designate  corporations  organized 
to  conduct  those  various  forms  of  private  business  not 
subject  to  special  regulations  and  restrictions  in  the  interest 
of  the  public.  All  corporations  for  mining,  manufacturing 
and  mercantile  pursuits  are  included  under  this  head. 

Business  corporations  are,  as  a  rule,  chartered  in  each 
state  under  general,  uniform  laws  and  forms,  have  no  special 
privileges,  and,  when  incorporated,  are  allowed  to  pursue 
their  corporate  ends  almost  as  freely  and  as  simply  as  would 
a  private  individual  or  firm  under  the  same  circumstances. 
The  majority  of  existing  corporations  belong  to  this  class 
and  the  great  mass  of  corporate  law  and  decisions  applies 
to  them  primarily.  For  the  other  classes  of  stock  corpora- 
tions there  are  special  laws,  special  limitations,  and,  in  some 
cases,  special  privileges. 

§  79.  Public  Utility  Corporations. 

Public  utility  corporations  are  those  organized  for  the 
purpose  of  securing  and  operating  under  some  franchise 
of  a  public  nature  which  confers  upon  such  corporations 
rights  or  privileges  which  other  citizens  and  private  cor- 


GENERAL    CONSIDERATIONS.  97 

porations  do  not  enjoy.  Usually  these  franchises  carry 
with  them  certain  rights  of  way,  or  condemnation  powers 
to  secure  such  rights  granted  by  the  state  under  its  power 
of  eminent  domain. 

An  ordinary  private  corporation  enjoys  no  exclusive 
franchise  of  this  nature,  and,  generally  speaking,  any  other 
body  of  citizens  may  incorporate  for  exactly  the  same  pur- 
poses and  carry  on  exactly  the  same  kind  of  business.  A 
company  organized  to  operate  a  public  utility  must,  however, 
have  special  rights  and  powers  affecting  the  public  welfare  or 
convenience,  and  usually  another  similar  corporation  would 
not  be  granted  these  identical  rights  and  powers  while  the 
former  corporation  was  in  active  existence.  For  instance, 
a  gas  company  must  have  the  right  to  tear  up  streets  in 
order  to  lay  and  repair  its  pipes.  The  ordinary  citizen 
or  corporation  has  no  such  right.  If  such  right  were  granted 
to  one  company,  the  same  right  in  the  same  territory  would 
not  properly  be  granted  to  another  company.  Should  such 
double  concession  be  made,  it  would  be  but  a  short  time 
until,  in  obedience  to  well-known  economic  laws,  the  two 
competing  companies  would  combine. 

This  peculiarity  is  true  of  all  classes  of  public  utility  corpo- 
rations. They  enjoy  franchises  that  cannot  be  granted  indis- 
criminately, and  that  tend  inevitably  to  monopoly.  They  en- 
joy these  special  privileges  for  the  purpose  of  supplying  cer- 
tain public  needs  that  must  be  supplied  uniformly.  They  can- 
not be  given  the  liberty  to  make  prices  and  conditions  that 
obtains  in  the  conduct  of  a  private  corporation.  Hence  the 
laws  under  which  they  receive  charters  should  guard  against 
the  indiscriminate  bestowal  of  such  rights  and  should  carefully 
regulate  charges  and  methods. 

In  many  states  the  charters  of  public  utility  corporations 
are  only  granted  by  special  acts  of  legislation,  in  others,  com- 
missions pass  upon  such  applications  and  decide  whether  the 
public  welfare  requires  the  issuance  of  the  desired  charter, 
while  in  other  states  such  corporations  are  chartered  under  the 
provisions  of  general  laws. 


THE    CHARTER. 

§  80.  Financial  Corporations. 

Experience  has  shown  that  it  is  unsafe  to  allow  irrespon- 
sible parties  to  incorporate  and  conduct  banks,  trust  companies, 
savings  institutions  and  similar  associations  dealing  with  the 
funds  of  others.  Hence,  institutions  of  this  sort  are  now  so 
hedged  about  with  restrictions  and  limitations  that,  in  a  meas- 
ure, their  conduct  is  confined  to  reputable  and  responsible  peo- 
ple. Their  safety  is  also  at  least  partially  assured  by  stringent 
rules  as  to  the  payment  of  stock  subscriptions  in  cash  before 
business  is  commenced,  and  as  to  the  liability  of  their  stock- 
holders thereafter.  In  national  banks  and  in  many  state  banks 
this  stockholder's  liability  is  equal  to  the  face  value  of  his  stock, 
thus  nominally  placing  $200  behind  each  $100  of  stock  as  se- 
curity for  deposits  and  credits  made  to  such  institutions. 

Usually  charter  applications  for  financial  corporations  must 
be  approved  by  some  department  or  official  of  the  state;  and 
after  incorporation  their  affairs  are  subject  to  the  inspection 
and  supervision  of  the  state  officials,  and  their  officers  are  re- 
quired to  make  regular  reports  of  their  business  and  financial 
condition.  National  banks  are  under  the  jurisdiction  of  the 
United  States  laws  and  are  not  subject  to  this  supervision  and 
regulation  from  the  authorities  of  the  state  in  which  they  op- 
erate. 

Speaking  generally,  both  public  utility  corporations  and 
financial  institutions  chartered  by  the  state  are  subject  to  the 
usual  statute  law  regulating  stock  corporations,  and  in  addition 
to  such  special  legislation  as  may  affect  them.  If  doing  busi- 
ness in  other  states  they  would  be  governed  by  the  local  regu- 
lations affecting  such  foreign  corporations. 

§  81.  Charter  Details. 

When  a  corporation  is  to  be  organized,  all  the  important 
features  which  are  peculiar  to  the  new  corporation  and  which 
are  not  secured  to  it  by  the  common  law,  or  necessarily  incident 
to  incorporation,  should  appear  in  its  charter.  These  are  usually 


GENERAL    CONSIDERATIONS.  99 

the  name,  purposes,  duration,  location,  capitalization  and  the 
details  thereof;  also  in  some  states  the  number  of  directors 
and  the  names  of  those  who  are  to  act  for  the  first  year,  and  any 
desired  special  provisions  that  can  be  made  a  permanent  part 
of  the  corporate  organization  under  the  laws  of  the  state  of 
incorporation.  Temporary  or  less  important  details  may  be 
left  for  by-law  or  other  regulation,  but  all  matters  of  perma- 
nence or  importance  should  appear  in  the  charter  as  far  as 
possible.  The  statutes  usually  require  the  main  features  out- 
lined above  to  appear  in  the  charter. 

In  New  York,  New  Jersey  and  some  other  states,  special 
provisions  may  be  inserted  in  the  charter  for  the  regulation  and 
conduct  of  the  corporate  business  and  affairs  and  for  any  proper 
limitations  on  the  powers  of  its  officials.  This  leaves  wide 
scope  for  the  insertion  of  such  provisions  and  many  peculiar 
arrangements  result  from  this  freedom. 

§  82.  Application  for  Charter. 

Special  charters  are  secured — where  not  prohibited  by  con- 
stitutional provision — by  application  to  the  legislature  of  the 
state.  The  charter  application  is  put  in  the  form  of  an  act  de- 
claring that  certain  named  parties  and  their  successors  are  a 
body  corporate  for  the  purposes  enumerated.  This  act,  if 
passed,  becomes  the  charter  of  the  company  and  is  its  sole 
authority  for  existence  and  operation. 

The  granting  of  special  charters  leads  to  grave  abuses  and 
in  many  states  is  prohibited  by  constitutional  provisions.  In 
other  states,  however,  as  in  New  York,  such  charters  are  still 
granted,  and  charters  may  be  secured  either  under  the  general 
corporation  laws,  or,  where  sufficient  influence  exists,  by  direct 
appeal  to  the  legislature. 

In  most,  if  not  all  the  states,  general  laws  have  been  passed 
prescribing  the  method  whereby  charters  may  be  secured. 
These  laws  are  modified  by  special  additional  requirements  in 
the  case  of  financial  and  public  utility  corporations.  Under  the 
provisions  of  such  general  laws  when  due  and  proper  applica- 


100  THE    CHARTER. 

tion  is  made  with  payment  of  the  proper  fees,  the  Secretary  of 
State  must  issue  a  charter  in  accordance  with  the  terms  of  the 
application,  or,  if  actual  issuance  of  the  charter  is  not  required, 
the  official  acceptance  and  filing  of  the  application,  ipso  facto, 
authorizes  the  parties  to  organize  as  a  corporation. 

This  is  the  usual  procedure  under  which  the  great  majority 
of  modern  business  corporations  come  into  existence.  It  is  a 
matter  of  right,  not  of  favor,  and  is  available  equally  for  all 
qualified  persons  who  choose  to  comply  with  the  necessary 
formalities  and  pay  the  required  fees.  (See  Forms  i  to  4.) 


CHAPTER  XIII. 
INCORPORATORS. 


§  83.  Who  may  Incorporate. 

Corporations  are  creatures  of  the  law.  They  derive  their 
right  to  existence  either  from  direct  legislative  enactment  or 
from  the  general  laws  under  which  they  are  formed.  This  be- 
ing true,  only  those  may  incorporate  who  are  expressly  author- 
ized thereto  by  these  special  acts  or  under  these  general  laws. 
In  each  state  the  statutes  must  be  consulted  in  order  to  ascertain 
definitely  just  who  may  participate  in  any  proposed  corpora- 
tion. 

Usually  the  statutes  authorizing  incorporations  employ  the 
term  "  persons  "  or  "  natural  persons  "  in  prescribing  who  may 
incorporate.  This  wording  excludes  a  firm,  a  corporation,  or 
any  one  acting  in  a  representative  capacity,  from  participation 
in  an  incorporation.  Any  of  these  might  hold  stock  in  the  cor- 
poration when  organized,  but  could  not  legally  act  as  an  incor- 
porator. 

As  the  charter  is  in  effect  a  contract,  a  person  unable  to  con- 
tract cannot  properly  act  as  an  incorporator.  This  is  a  matter 
of  common  law  and  excludes  minors,  persons  of  unsound  mind 
and  others  incompetent  to  contract.  Under  the  old  common 
law,  it  would  also  exclude  married  women,  but  this  disability 
has  been  generally  removed  and  married  women  frequently  act 
as  incorporators. 

In  some  states  one  or  more  of  the  incorporators  must  be 
citizens  of  the  state  of  incorporation.  Unless  this  were  ex- 
pressly prescribed,  any  person  otherwise  competent  could  act 
whether  a  citizen  of  the  state  or  not.  Incorporators  need  not 
even  be  citizens  of  the  United  States  unless  expressly  required 

101 


:     102  THE    CHARTER. 

**•  by  thestafot<§s/  :  In  New  York,  at  least  one  of  the  incorporators 
must  be  a  resident  of  the  state,  and  two-thirds  of  the  total  num- 
ber must  be  citizens  of  the  United  States.  In  New  Jersey  none 
of  the  incorporators  need  be  citizens  either  of  the  state  or  of 
the  United  States. 

It  must  be  borne  in  mind  that  each  state  has  the  entire  right 
to  impose  any  qualifications  on  incorporators  that  may  seem  de- 
sirable and  that  there  is  no  appeal  from  such  statutory  require- 
ments. Usually,  however,  the  matter  is  not  of  great  import- 
ance, as,  if  any  of  the  proposed  incorporators  are  barred  by 
statute  requirements,  a  substitute  may  be  appointed  who  is  qual- 
ified, and  who  will  act  up  to  such  point  as  is  necessary  or  de- 
sirable and  then  transfer  his  subscription  and  all  his  rights  to 
the  party  for  whom  he  has  been  acting.  (See  §  87.) 

§  84.  Number  of  Incorporators. 

The  minimum  number  of  incorporators  is  prescribed  by 
statute,  and  in  most  states  is  three,  though  in  a  few  states  five 
are  required.  No  maximum  number  is  designated  in  any  state, 
this  feature  being  a  matter  of  no  importance  from  the  stand- 
point of  the  state. 

As  a  general  rule  it  is  advisable  to  incorporate  with  the 
minimum  number  of  incorporators  permitted  by  the  statutes. 
Usually  each  incorporator  must  sign  and  acknowledge  the 
charter  application,  and  must  either  sanction  or  participate  in 
the  first  meeting,  and  these  proceedings  are  much  facilitated 
by  a  small  number  of  incorporators.  At  times  different  inter- 
ests must  be  represented  in  an  incorporation  and  the  subsequent 
organization,  and  a  considerable  number  of  incorporators  is 
therefore  unavoidable,  but  without  some  such  reason  the  mini- 
mum number  is  to  be  preferred. 

§  85.  Functions  of  Incorporators. 

The  incorporators  furnish  the  nucleus  about  which  the  pro- 
posed corporation  is  formed.  Their  function  is  merely  to  par- 
ticipate in  certain  formalities  incident  to  the  creation  of  the 


INCORPORATORS.  103 

corporation.  They  must  usually  sign  and  acknowledge  the 
charter  and  are  generally  required  to  be  subscribers  to  the  stock 
of  the  corporation.  They  call  and  conduct  the  first  meeting. 
The  organization  of  the  corporation  is  usually  entirely  in  their 
hands,  though  in  case  they  are  not  the  real  parties  in  interest 
the  organization  and  first  proceedings  will  be  prescribed  for 
them  in  advance. 

It  will  be  seen  that  the  only  necessary  function  of  the  incor- 
porators  is  to  figure  in  certain  formalities  essential  to  the  for- 
mation of  the  new  corporation.  They  may  be  the  real  parties 
in  interest  who  will  remain  with  and  own  stock  in  the  new  cor- 
poration, or  they  may  be  "  dummy  "  incorporators,  called  in 
merely  as  a  matter  of  convenience,  or  for  more  cogent  reasons, 
without  interest  in  the  corporation  beyond  their  perfunctory 
subscription  for  one  or  more  qualifying  shares — an  interest 
that  is  usually  assigned  to  the  real  parties  in  interest  so  soon  as 
the  corporation  is  once  organized  and  ready  to  begin  its  opera- 
tions. (See  §  87.) 

§  86.  Incorporators  as  Stockholders. 

It  is  usual  for  incorporators  to  be  subscribers  for  one  or 
more  shares  of  stock  in  the  proposed  corporation.  In  most  of 
the  states,  such  subscription  is  either  required,  or  it  is  assumed 
that  such  subscription  will  be  made.  If  not  either  directly  or 
inferentially  required  by  the  statutes,  such  subscription  is  not 
essential. 

When  an  incorporation  is  effected  with  incorporators  who 
do  not  desire,  or  are  not  desired  to  remain  as  permanent  stock- 
holders, it  is  usual  after  the  organization  has  been  completed, 
for  the  incorporators  to  assign  their  subscription  rights  or  their 
stock  to  those  parties  who  are  to  be  stockholders.  These  latter 
assume  the  obligations  of  the  incorporators  on  the  assigned 
subscriptions  or  stock,  and,  if  the  transaction  is  acquiesced  in 
by  the  corporation,  it  is  then  legally  complete  and  the  original 
incorporators  are  discharged  from  any  subscription  obligations. 
(See  I  Cook  on  Corps.,  §  255  and  cases  cited.)  (See  §  87.) 


104  THE    CHARTER. 

§  87.  Dummy  Incorporators. 

As  has  been  stated,  any  competent  person  may  join  in  an 
incorporation  without  any  material  or  permanent  interest  in  the 
matter,  and  such  non-interested  or  "  dummy  "  incorporators 
are  frequently  employed.  Sometimes  this  is  done  where  the 
real  parties  in  interest  do  not  wish  to  appear  as  incorporators, 
sometimes  of  necessity  because  of  the  absence  of  the  princi- 
pals, and  sometimes  purely  as  a  matter  of  convenience,  the  real 
parties  concerned  being  disinclined  or  too  busy  to  undertake 
themselves  the  technical  duties  of  incorporators. 

In  such  cases,  the  dummy  incorporators  execute  the  charter 
and  organize  the  corporation,  usually  subscribing  for  the  small- 
est number  of  shares  that  will  satisfy  the  statute  requirements. 
The  organization  will  be  carried  to  such  point  as  the  real  par- 
ties in  interest  or  their  attorneys  indicate,  and  the  "  dummies  " 
then  assign  their  subscription  rights  or  stock,  resign  any  offi- 
cial positions  they  may  hold  in  the  new  corporation  and  step 
down  and  out. 

Such  an  incorporation,  if  properly  conducted,  is  entirely  legal 
and  is  the  method  pursued  in  the  formation  of  almost  all  the 
larger  corporations  and  combinations.  The  proceedings  are, 
as  a  matter  of  course,  supervised  and  ordinarily  conducted  by 
the  attorneys  of  the  parties  really  interested,  these  attorneys 
dictating  all  that  is  done  and  seeing  that  the  interests  of  their 
clients  are  properly  conserved.  The  proceeding  is  carried  as 
far  as  the  conditions  render  advisable  before  the  dummy  incor- 
porators make  way  for  their  principals.  Usually  they  fully 
complete  the  organization  of  the  corporation,  electing  them- 
selves directors,  sometimes  electing  the  permanent  officers  and 
at  other  times  filling  these  official  positions  temporarily  them- 
selves, meanwhile  taking  action  of  the  greatest  moment  to  the 
future  of  the  new  corporation. 

The  organization  of  the  United  States  Steel  Corporation 
was  effected  in  this  way.  Three  incorporators  were  provided, 
each  of  whom  subscribed  for  ten  shares  of  stock  out  of  a  total 


INCORPORATORS.  105 

capitalization  of  but  $3,000.  The  incorporation  was  then  ef- 
fected, the  organization  of  the  new  corporation  was  completed, 
the  incorporators  were  retired,  and  the  capitalization  was  in- 
creased to  $1,100,000,000.  (See  Form  6.) 

In  such  cases  the  incorporators  are  usually  the  junior  coun- 
sel and  clerks  in  the  offices  of  the  attorneys  having  the  incor- 
poration in  charge.  As  stated,  if  the  incorporators  are  prop- 
erly qualified  and  the  proceedings  are  conducted  in  accordance 
with  the  statute  requirements,  there  is  no  question  as  to  the 
legality  of  the  method.  (See  §  210  and  cases  there  cited.) 


CHAPTER  XIV. 
THE    CORPORATE    NAME. 


§  88.  How  Secured. 

The  name  of  any  proposed  corporation  must  be  set 
forth  specifically  in  its  charter  application.  This  name,  so 
soon  as  the  application  is  allowed,  becomes  the  name  and 
property  of  the  new  corporation.  For  that  state  the  right 
to  such  name  is  exclusive. 

If  the  name  chosen  were  the  same  as  that  of  some  other 
domestic  corporation  or  foreign  corporation  licensed  to 
do  business  within  the  state,  or  so  nearly  the  same  as  to 
cause  confusion,  that  fact  alone  would  be  ground  for  the 
rejection  of  the  charter  application.  If,  under  such  circum- 
stances, the  application  were  inadvertently  allowed,  the 
name  would  technically  become  the  property  of  the  new 
corporation,  but  the  other  corporation  would  have  the 
superior  right  and  could  by  injunction  prevent  any  con- 
flicting use. 

But  few  statutory  restrictions  exist  in  regard  to  the  cor- 
porate name.  The  prohibition  against  the  adoption  of  a 
name  similar  to  that  of  a  corporation  already  doing  business 
under  the  state  laws  is  the  most  important.  In  some  states 
the  prefix  "  The  "  must  be  used  to  introduce  the  corporate 
appellation ;  elsewhere  "  corporation,"  "  company,"  "  asso- 
ciation "  or  some  other  word  expressing  the  idea  of  asso- 
ciation must  be  used  in  the  corporate  name.  In  some  few 
states,  the  word  "  incorporated  "  or  "  limited  "  must  follow 
the  corporate  designation. 

The  state  authorities  have  no  right  to  refuse  a  charter 
application  on  the  ground  that  some  foreign  corporation, 

106 


THE    CORPORATE    NAME.  107 

not  licensed  by  the  state,  is  using  the  selected  name.  In 
such  event  the  charter  application,  if  no  other  objection 
existed,  must  be  allowed  and  the  right  to  use  the  name 
left  to  be  settled  between  the  two  corporations.  (See  §  90.) 

§  89.  Selection  of  Name. 

The  selection  of  the  corporate  name  is  frequently  a 
matter  of  considerable  importance,  though  usually  governed 
by  business  considerations  rather  than  legal  rules.  As  a 
matter  of  both  taste  and  business  a  name  should  be  selected 
that  is  distinctive,  not  too  long,  and,  if  possible,  expressive 
of  the  business  to  be  done  by  the  corporation. 

In  the  incorporation  of  a  partnership,  the  general  plan 
is  to  retain  the  partnership  name  with  only  such  changes  as 
will  indicate  the  corporate  organization.  (See  §  247.) 

In  most  states  great  latitude  is  allowed  in  the  selection 
of  the  corporate  name,  the  prohibition  against  conflicting 
names  being  practically  the  only  restriction.  If  not  required 
by  statute,  the  use  of  the  prefix  "  The  "  is  to  be  avoided 
as  unnecessarily  lengthening  the  name  and  producing  a 
peculiarly  awkward  effect  in  legal  instruments  when  the 
name  is  used,  following  the  word  "  said  "  as  is  frequently 
the  case. 

Hackneyed  names  such  as  "  Standard,"  "  Excelsior," 
and  "  International,"  as  well  as  much-used  geographical 
names  are  to  be  avoided,  both  as  a  matter  of  taste  and 
business.  No  trade-name  rights  can  ordinarily  be  secured 
in  such  well-worn  designations. 

§  90.  Right  to  Corporate  Name. 

One  important  object  of  incorporation  is  to  secure  per- 
manence, and  the  corporate  name  is  an  almost  essential 
element  of  this  desired  commercial  continuity.  Once  estab- 
lished, the  name  is  the  embodiment  of  the  good-will  of  the 
enterprise  and  has  a  value  in  accordance.  If  the  corpora- 


108  THE    CHARTER. 

tion  is  properly  managed  and  is  successful  this  value  may 
be  and  frequently  is  very  considerable.  In  some  instances 
it  has  been  the  chief  asset  of  a  valuable  business. 

The  corporation's  right  to  its  name  is  the  same  as  to 
any  other  trade-mark  or  trade-name  possessed  by  it,  and  is 
generally  more  easily  established.  If  the  name  is  used  by 
other  parties  without  authority  such  use  may  be  stopped  by 
injunction,  and,  if  damage  can  be  shown,  an  action  will  lie 
against  the  offending  parties.  (Higgins  Co.  vs.  Higgins 
Soap  Co.,  144  N.  Y.,  462,  1895;  Columbia  Co.  vs.  O'Brien, 
101  App.  Div.,  N.  Y.,  296,  1905.) 

As  has  been  stated,  there  is  usually  no  statute  restriction 
against  the  adoption  of  the  name  of  a  foreign  corporation 
by  a  domestic  corporation  if  such  foreign  corporation  has 
not  been  licensed  to  operate  in  the  state.  The  allowance 
of  such  name  would  not,  however,  give  the  new  corporation 
an  unquestioned  right  to  its  use.  If  the  older  corporation 
could  show  that  it  had  a  trade  right  in  the  name,  and  that 
the  use  of  the  name  by  the  new  corporation  would  be  inju- 
rious to  these  rights,  the  new  corporation  might  be  enjoined 
from  the  use  of  such  name  and  if  the  injunction  should  be 
sustained  would  be  compelled  either  to  secure  a  new  name 
by  due  and  formal  precedure  or  discontinue  its  operations. 
(Koehler  vs.  Sanders,  122  N.  Y.,  65,  1890;  Investor  Pub. 
Co.  vs.  Dobinson,  82  Fed.  Rep.,  56,  1897.) 

§  91.  Changing  the  Corporate  Name. 

Occasionally  it  becomes  necessary  or  expedient  to 
change  the  corporate  name.  It  may  be  that  the  use  of  the 
name  first  adopted  is  prevented  by  injunction,  or  new 
interests  may  have  come  in,  that,  as  a  matter  of  business 
policy,  must  be  represented  in  the  corporate  name,  or  pos- 
sibly the  corporation  has  been  unsuccessful,  or  has  achieved 
a  bad  reputation,  and  the  adoption  of  a  new  name  is  thought 
desirable.  In  any  such  case,  the  name  may  only  be  changed 
with  the  permission  and  sanction  of  the  state. 


THE    CORPORATE    NAME.  109 

In  many  states,  the  change  of  name  is  secured  by  an 
amendment  to  the  charter,  which  is  a  more  or  less  trouble- 
some operation  according  to  the  statutory  requirements  of 
the  particular  state.  Other  more  or  less  troublesome  pro- 
ceedings obtain  in  different  states,  as  in  New  York  where 
the  prescribed  method  of  changing  the  corporate  name  is 
by  formal  court  proceedings.  On  account  of  these  dif- 
ficulties in  some  cases  it  is  simpler  and  no  more  expensive 
to  organize  a  new  corporation  and  transfer  to  it  the  assets 
of  the  existing  corporation,  than  to  take  the  time  and 
trouble  incident  to  a  change  of  name  by  the  regular  pro- 
cedure. 


CHAPTER  XV. 
THE    CORPORATE    PURPOSES. 

§  92.  General. 

An  individual  or  firm  may  do  anything  or  engage  in  any 
form  of  business  not  prohibited  by  the  laws.  A  corporation, 
on  the  contrary,  may  only  do  those  things  and  engage  in  those 
businesses  permitted  it  by  the  law  and  set  forth  in  its  charter. 
This  renders  it  important  that  the  charter  should  clearly  and 
fully  empower  the  corporation  to  do  all  those  permissible  things 
that  may  be  necessary  in  its  operations. 

Usually  the  general  corporation  laws  in  each  state  specify 
the  purposes  for  which  corporations  may  be  organized.  In 
some  states  these  purposes  are  limited  to  certain  classes  of  pur- 
suits, and  corporations  cannot  be  formed  for  purposes  not 
specifically  included.  Mining  and  manufacturing  corporations 
are  authorized  in  all  states.  In  most  states  the  laws  specify 
mercantile  and  trading  corporations  as  well.  Some  states  go 
still  further  and  broadly  authorize  the  formation  of  corpora- 
tions for  "  any  lawful  business,"  "  any  lawful  industry  or  pur- 
suit "  or  for  "  pecuniary  profit." 

Under  these  latter  clauses  it  would  be  difficult  to  discover 
any  legitimate  calling  or  pursuit  that  can  not  be  undertaken 
by  a  corporation.  The  tendency  of  the  present  day  is  towards 
liberality  in  this  respect  and  the  few  limitations  that  do  exist 
are  gradually  being  removed. 

§  93.  Single  Purpose. 

Formerly  the  rule  was  to  organize  corporations  for  a  single 
purpose,  as  to  mine  for  silver,  to  manufacture  shoes,  or  to  con- 
duct a  trading  business  in  some  specified  line.  In  a  few  states 
this  is  still  the  rule  and  a  corporation  will  not  be  chartered  for 

110 


THE    CORPORATE    PURPOSES.  Ill 

more  than  one  purpose.  The  authorization  for  this  one  pur- 
pose would,  as  a  matter  of  course,  carry  the  right  with  it  to  do 
all  things  necessary  or  proper  to  effect  that  purpose,  but  noth- 
ing further.  If  another  line  of  business  were  to  be  taken  up 
a  new  corporation  must  be  organized,  as  the  powers  of  the  old 
corporation  could  not  be  extended  to  cover  the  new  pursuit. 
That  is,  if  the  silver  mining  company  wished  to  mine  for  cop- 
per also,  it  could  not  secure  specific  authorization  thereto  and 
a  new  company  would  be  required  to  accomplish  this  purpose. 
At  present  this  rule  has  been  practically  abrogated.  It  still 
prevails  in  a  few  states,  but  generally  a  corporation  will  now 
be  empowered  for  as  many  legitimate  purposes  as  may  be  in- 
cluded in  the  charter  application.  In  some  few  cases,  however, 
it  is  still  advantageous  to  confine  the  corporate  activities  to  one 
specific  purpose.  For  instance,  if  a  partnership  is  incorporated, 
it  may  be  advisable  to  restrict  it  to  the  purposes  of  the  business 
already  under  way.  This  would  prevent  any  subsequent  diver- 
sion of  the  corporate  activity  and  resources  into  other  and  pos- 
sibly dangerous  channels.  The  corporation  could  conduct  the 
one  business  and  that  alone.  It  would  have  no  power  to  ven- 
ture into  new  and  untried  fields. 

§  94.  Comprehensive  Purposes. 

At  the  present  time  the  tendency  in  corporate  organization 
is  towards  comprehensive  purposes — purposes  that  will  permit 
the  corporation  to  undertake  and  operate  any  line  of  business, 
in  any  part  of  the  world  and  under  any  conditions.  It  is  the 
natural  desire  to  secure  all  powers  and  privileges  that  may  be 
had — not  that  they  are  all  needed  or  to  be  exercised,  but  un- 
foreseen opportunities  may  occur  when  these  powers  will  be  re- 
quired. Incorporators  are  pleased  with  these  extensive  arrays 
of  possible  activities,  investors  and  interested  parties  generally 
expect  them,  and,  as  their  inclusion  is  a  matter  of  little  diffi- 
culty, nearly  all  modern  charters  enumerate  almost  every  con- 
ceivable branch  of  business  and  every  kind  of  enterprise  allow- 
able under  the  statutes.  (See  Forms  6  and  7.) 


112  THE    CHARTER. 

In  some  cases  this  has  been  carried  to  an  absurd  extreme, 
but  in  general  the  practice  has  its  advantages.  There  is  no 
good  reason  why  corporations  should  not  have  the  same  free 
range  of  business  activities  possessed  by  the  individual  or  firm, 
and  the  effort  of  the  present  day  is  to  approximate  as  nearly  as 
may  be  to  this  ideal. 

It  is  to  be  noted,  however,  that  this  end  could  be  attained 
with  equal  efficiency  and  with  much  less  trouble  and  verbosity 
by  a  few  general  statements  of  comprehensive  scope.  The  en- 
tire purposes  of  the  most  elaborately  extended  charter  could  be 
obtained  in  their  full  force  and  efficiency  by  a  few  well  turned 
phrases. 

§  95.  Illegal  Purposes. 

No  state  of  the  Union  allows  the  organization  of  a  corpo- 
ration for  illegal  or  immoral  purposes.  Where  state  officers 
inadvertently,  or  by  intent,  allow  charters  for  such  purposes, 
the  authorization  of  these  charters  is  void  and  ineffective  and 
will  not  protect  the  stockholders  from  any  penalties  and  liabili- 
ties that  would  be  visited  upon  the  members  of  a  partnership 
engaged  in  similar  undertakings. 

This  would  apply  to  any  business,  occupation  or  organiza- 
tion in  direct  violation  of  the  laws  of  the  state  of  incorporation, 
such  as  lotteries,  gambling  and  combinations  in  restraint  of 
trade. 

Apart  from  these  manifestly  illegal  or  immoral  undertak- 
ings, any  purposes  not  allowed  to  corporations  under  the  laws 
of  the  state  are  illegal.  A  charter  for  any  such  purpose,  even 
if  allowed  by  the  state  officials,  would  be  ineffective  and  the 
stockholders  would  be  held  as  partners  in  case  of  the  insolvency 
of  the  enterprise.  This  does  not  often  happen  at  the  present 
day,  as  most  of  the  states  allow  incorporation  for  all  proper 
purposes  and  the  possibility  exists  only  in  those  states  where 
corporate  purposes  are  still  restricted. 

Also  it  is  to  be  noted  that  if  a  portion  of  the  purposes  is 
legitimate  and  proper,  and  a  portion  unauthorized,  the  charter 


THE    CORPORATE    PURPOSES.  113 

would  be  held  good  as  to  the  legitimate  portions  and  as  non- 
existent and  non-effective  only  in  those  portions  unauthorized 
or  in  conflict  with  the  laws.  (Eastern  P.  R.  Co.  vs.  Vaughan, 
14  N.  Y,  546,  1856.) 

§  96.  Things  "  Ultra  Vires." 

Things  otherwise  legal  but  not  specified  among  the  charter 
powers  of  the  corporation  are  beyond  its  powers,  or  ultra 
vires.  Contracts  made  in  pursuance  of  such  unauthorized  ends 
cannot  be  enforced  against  others,  although  the  corporation 
itself  is  usually  bound.  Directors  and  officers  may  make  them- 
selves personally  liable  for  involving  the  corporation  in  such 
transactions. 

Both  creditors  and  stockholders  have  the  right  to  object  to 
any  action  of  the  corporation  exceeding  its  legal  powers.  It 
is  to  be  noted,  however,  that  if  the  stockholders  assent  and 
there  are  no  creditors,  there  is  no  one  to  object  if  a  corporation 
does  exceed  its  charter  powers.  Under  these  circumstances 
such  powers  may  be  exceeded  without  danger  to  the  officers 
and  directors.  Owing  to  the  broad  powers  that  are  now  usu- 
ally granted,  the  doctrine  of  ultra  vires  has  much  less  import- 
ance than  formerly.  A  modern  text  book  says: 

"  The  old  theory  of  a  corporation  was  that  it  could 
not  legally  do  anything  in  excess  of  its  express  or  implied 
powers.  But  the  modern  view  is  that  a  private  corpo- 
ration may,  if  all  its  stockholders  assent  and  if  creditors 
are  paid.  Public  policy  does  not  require  business  corpo- 
rations to  confine  themselves  strictly  within  the  limits 
of  the  words  of  their  charters."  i  Cook  on  Corpora- 
tions, §  3. 

(See  series  of  modern  cases  in  64  L.  R.  A.,  366,  et  seq., 
on  implied  powers  of  corporations.) 


CHAPTER  XVI. 
STOCK  CLAUSES. 


§  97.  General. 

In  most  states  the  capital  stock  of  a  corporation  and  the 
divisions  and  general  features  of  this  capital  stock  must  be 
stated  in,  and  are  fixed  by  the  charter.  In  a  few  states,  stock 
with  special  preference  or  features  may  be  issued  after  the 
allowance  of  the  charter  by  certain  specified  action  of  the  stock- 
holders, but  as  a  general  rule  everything  relating  to  the  stock 
is  fixed  once  for  all  by  the  charter  and  may  only  be  changed 
thereafter  by  an  amendment  of  that  instrument. 

Usually  the  charter  must  state  the  full  amount  of  the  capi- 
tal stock,  its  division  into  common  and  preferred  stock,  if  such 
division  exists,  the  number  of  shares  into  which  it  is  divided 
and  the  par  value  of  each  share.  This  par  value  is  usually  the 
same  for  all  the  shares,  though  not  necessarily  so.  The  par 
value  of  the  common  stock  might  be  fixed  at  $10  per  share, 
while  the  par  value  of  the  preferred  stock  was  fixed  at  $100. 
Generally  such  variations  of  the  par  value  are  not  advisable. 

§  98.  Classifications. 

Any  classifications  of  the  stock  should  be  very  clearly  set 
out  in  the  charter.  These  classifications  are  varied  and  nu- 
merous. The  most  usual  is  that  of  common  and  preferred 
stock.  This  preferred  stock  may  be  divided  into  different 
classes  as  to  precedence  in  dividends,  or  as  to  amount  of 
dividend,  or  as  to  participation  in  assets,  or  as  to  redemption 
features,  or  as  to  participation  in  dividends  beyond  preferred 
dividends,  or  as  to  voting  or  other  powers. 

The  common  stock  is  sometimes  classified  in  regard  to  vot- 
ing powers,  each  portion  or  class  having  the  right  to  elect  a 

114 


•  STOCK   CLAUSES.  15 

certain  number  of  directors,  or  at  times  one  portion  of  the 
common  stock  may  be  given  the  sole  right  to  vote  upon  certain 
kinds  of  questions,  or  under  certain  contingencies. 

Such  charter  classifications  are  not  allowable  in  all  of  the 
states,  but  the  same  result  may  be  attained  in  many  cases  by 
suitable  by-law  enactments,  unanimously  adopted  at  the  first 
meeting  of  stockholders.  As  stated  by  Judge  Folger  in  Kent 
vs.  Quicksilver  Mining  Co.,  78  N.  Y.,  178  (1879)  : 

"  We  know  nothing  in  the  constitution  or  the  law 
that  inhibits  a  corporation  from  beginning  its  corporate 
action  by  classifying  the  shares  in  its  capital  stock  with 
peculiar  privileges  to  one  share  over  another  and  then 
offering  its  stock  to  the  public  for  subscription  thereto." 
(See  §§  49,  114,  232,  239  and  252.) 

§  99.  Common  Stock. 

Usually  the  charter  provisions  affecting  common  stock  are 
few  and  simple.  If  the  corporation  were  to  be  capitalized  at 
$100,000  with  shares  of  the  par  value  of  $100,  without  pre- 
ferred stock  or  classifications  of  the  common  stock,  the  charter 
would  merely  state  that  the  capital  stock  was  to  be  $100,000, 
divided  into  1,000  shares  of  the  par  value  of  $100  each.  Noth- 
ing more  would  be  necessary.  The  fact  that  it  was  all  com- 
mon stock,  that  this  was  unclassified  and  that  there  was  no  pre- 
ferred stock  or  restrictions  of  any  kind  on  the  common  stock, 
would  be  understood  without  specific  statement. 

If  there  are  to  be  any  classifications  of  the  common  stock, 
or  any  restrictions  upon  it  in  any  way,  these  must  be  stated  in 
the  charter,  specifically  and  in  detail.  The  mere  fact  that  com- 
mon stock  is  usually  unrestricted  renders  it  the  more  necessary 
to  be  clear  and  explicit  if  restrictions  are  to  be  created. 

§  100.  Preferred  Stock. 

Preferred  stock,  by  its  mere  existence,  indicates  the  fact 
that  it  has  features  not  possessed  by  other  stock  of  the  corpo- 
ration, but  the  differences  and  preferences  which  distinguish 


116  THE    CHARTER. 

it  should  be  stated  as  clearly  as  possible  in  the  creating  clause 
and  also  so  concisely,  if  it  may  be  done,  that  the  entire  clause 
may  be  printed  on  the  face  of  each  certificate  of  this  preferred 
stock. 

It  should  be  borne  in  mind  that  unless  otherwise  provided 
by  the  charter,  preferred  stock  has  all  the  rights  of  common 
stock  in  addition  to  its  preference ;  that  is,  it  would  vote,  par- 
ticipate in  any  dividends  in  excess  of  its  preferential  dividend, 
participate  in  any  distribution  of  assets  on  the  dissolution  of  the 
corporation,  and,  generally,  be  on  exactly  the  same  plane  as 
common  stock,  except  as  to  the  indicated  preference  in  divi- 
dends. If  any  of  these  rights  are  to  be  denied  it,  such  denial 
must  be  clearly  expressed.  If  it  is  to  have  any  rights  other 
than  its  preference  dividends,  these  rights  must  also  be  clearly 
indicated.  Nothing  should  be  left  to  implication,  or  be 
taken  for  granted.  (See  Chap.  VIII,  Preferred  Stock.) 


CHAPTER  XVII. 
LOCATION    AND    DURATION    OF    CORPORATION. 


§  101.  Domestic  and  Foreign  Corporations. 

In  its  own  state — the  state  in  which  it  is  incorporated — 
a  corporation  is  a  "  domestic  corporation."  Elsewhere  it  is 
designated  a  "  foreign  corporation."  In  its  own  state  it  usually 
enjoys  rights  and  privileges  not  accorded  a  foreign  corporation, 
hence,  unless  there  is  some  strong  reason  to  the  contrary,  it 
should  always  be  incorporated  in  the  state  in  which  the  larger 
part  of  its  business  is  to  be  done. 

§  102.  Selection  of  State. 

The  usual  inducements  for  foreign  incorporation  are  the 
smaller  fees  and  taxes  of  the  selected  state.  (See  Chap.  V, 
Cost  of  Incorporation.) 

Unless  there  is  a  material  difference  in  favor  of  foreign 
incorporation,  it  should  be  avoided.  Corporations  organized 
outside  the  state  are  always  liable  to  adverse  discrimination, 
and,  in  many  states,  are  at  a  positive  disadvantage  in  event  of 
litigation.  (See  Chap.  IV,  Where  to  Incorporate.) 

§  103.  Principal  Office. 

Usually  the  location  of  the  office  in  which  the  corporation 
will  have  its  headquarters  must  be  designated  in  the  charter 
application.  In  New  Jersey  and  most  of  the  other  states,  this 
principal  office  must  be  located  definitely.  In  New  York,  the 
borough  and  county  in  which  the  principal  office  may  be  found 
must  be  given,  but  neither  then  nor  later  is  any  more  definite 
address  required.  This  renders  it  impossible  to  secure  the 

117 


118  THE    CHARTER. 

local  address  of  a  corporation  from  its  charter — a  seemingly 
serious  omission. 

It  is  a  general  principle  of  law  that  stockholders'  meet- 
ings must  be  held  within  the  state  of  incorporation  and  the 
principal  office  in  that  state  is  usually  designated  by  the 
by-laws  as  the  place  where  such  meetings  are  to  be  held. 
One  or  two  states,  by  statute  provision,  permit  stockholders' 
meetings  to  be  held  outside  the  state  but  the  practice, 
though  convenient  in  some  cases,  is,  generally  speaking, 
objectionable. 

Meetings  of  the  directors  must  also  be  held  within  the 
state  of  incorporation  unless  permitted  elsewhere  by  statu- 
tory provision.  Such  permission  is  given  by  several  of  the 
states,  and,  used  under  proper  regulations  as  to  the  place 
of  meeting  and  notice  thereof,  is  at  times  of  much  advantage. 

Meetings  of  both  stockholders  and  directors  are  usually 
held  in  the  principal  office  in  the  state  of  incorporation. 
To  allow  meetings  of  either  stockholders  or  directors  to 
be  called  elsewhere,  unless  in  places  formally  designated  by 
the  by-laws  or  agreed  to  by  all  parties  in  interest,  gives 
opportunity  for  grave  abuses.  The  by-laws  should  designate 
the  principal  office  and,  unless  there  is  good  reason  for 
doing  otherwise,  prescribe  that  all  corporate  meetings  be 
held  therein. 

The  principal  office  in  the  state  of  incorporation  is 
usually  designated  by  the  statutes  as  the  place  where  legal 
process  may  be  served  on  the  corporation. 

§  104.  Duration. 

In  certain  states,  the  existence  of  a  corporation  is  limited 
to  some  fixed  period  as  twenty  or  fifty  years.  In  most  of 
the  states,  however,  its  duration  may  be  made  nominally 
perpetual.  This  unrestricted  duration  is  advantageous  and 
is  in  line  with  the  greater  liberality  manifested  towards  cor- 
porations in  later  years.  No  serious  objection  can  be  urged 
against  it,  the  re-incorporations  necessary  in  the  short 


LOCATION    AND    DURATION    OF    CORPORATION.  119 

period  states  are  avoided,  and  the  general  stability  of  the 
corporation  is  improved. 

Where  the  period  of  corporate  existence  is  limited,  the 
extreme  time  allowed  by  the  statutes  is  usually  selected  with 
the  expectation  of  a  re-incorporation  at  the  end  of  the  stated 
period.  At  times,  limited  periods  are  preferred  for  the 
corporate  existence  in  order  to  definitely  limit  the  period 
of  the  associated  undertaking.  In  such  case,  at  the  end  of 
the  selected  term,  the  corporation  expires  by  limitation,  its 
assets  are  distributed,  and  the  corporate  venture  is  ter- 
minated. Usually  such  Distribution  is  made  under  some  pre- 
arranged plan  in  order  to  avoid  the  losses  and  injury  to 
good-will  of  a  forced  liquidation. 


CHAPTER  XVIII. 
THE    BOARD    OF    DIRECTORS. 


§  105.  Qualifications. 

At  common  law  it  was  not  required  that  directors  should 
be  stockholders.  In  most  states  of  the  Union  this  has  been 
modified  by  statute  provisions  requiring  that  directors  hold 
one  or  more  shares  of  stock.  Such  provisions  do  not  apply, 
unless  expressly  so  stated,  to  directors  named  in  or  ap- 
pointed by  the  charter.  In  New  York,  the  statute  requiring 
directors  to  be  stockholders  may  be  waived  by  proper 
charter  or  by-law  provision,  and  persons  not  stockholders 
may  then  be  selected  as  directors  of  the  corporation. 

In  general  it  is  very  advisable  that  directors  should  be 
stockholders  of  the  corporation  in  which  they  act,  and  the 
liberality  of  the  laws  in  permitting  persons  who  are  not 
stockholders,  or  who  hold  but  one  or  two  shares,  to  act  as 
directors,  is  not  in  the  best  interests  of  stockholders. 
Occasionally  the  privilege  may  be  advantageous,  but  as  a 
general  rule  the  management  of  a  business  enterprise  cannot 
safely  be  placed  in  the  hands  of  those  having  no  material 
interest  in  its  success,  and  the  incorporation  of  an  enterprise 
does  not  except  it  from  this  rule. 

In  most  states,  one  or  more  of  the  directors  must  be 
residents  of  the  state  of  incorporation.  In  such  cases,  where 
the  parties  really  interested  reside  in  other  states  than  the 
one  selected  for  incorporation,  resident  directors  must  be 
secured.  In  some  states,  as  New  Jersey,  Delaware,  Maine 
and  South  Dakota,  this  has  led  to  the  organization  of  con- 
cerns whose  sole  business  is  the  supplying  of  resident 
directors  and  the  representation  of  outside  corporations 

120 


THE    BOARD    OF    DIRECTORS. 


organized  within  the  state.  At  times  this  results  in  giving 
some  dummy  director  the  deciding  vote  as  between  two 
equally  divided  factions  of  the  board. 

Unless  debarred  by  some  statutory  prohibition,  anyone 
capable  of  acting  as  an  agent  of  a  corporation  might  act 
as  its  director.  A  trustee,  or  an  executor  of  an  estate  con- 
sisting in  part  of  stock,  would  be  eligible  as  a  director. 
Under  the  modern  statutes  removing  the  disabilities  of  mar- 
ried women,  they  may  act  as  directors.  Unless  expressly 
prohibited  by  statute,  aliens  may  also  act  as  directors.  (See 


§  1  06.  Number. 

Within  certain  limits  the  number  of  directors  is  usually 
designated  by  the  statutes.  The  exact  number  within  these 
limits  is,  in  most  states,  fixed  by  the  charter.  In  practically 
all  the  states  a  minimum  number  of  directors  is  fixed  by  the 
statutes,  though  in  many  no  maximum  number  is  prescribed. 

In  general  the  board  should  be  fixed  at  the  lowest  num- 
ber that  will  permit  due  representation  of  the  various  inter- 
ests involved  and  provide  for  the  proper  transaction  of 
business.  In  small  or  close  corporations  it  is  usual  to  select 
the  minimum  number  of  directors  permitted  by  the  statutes. 
In  the  larger  corporations  more  directors  are  usually  nec- 
essary in  order  that  all  the  interested  parties  may  be  rep- 
resented, or  in  order  that  all  the  parties  really  concerned 
in  the  management  of  the  corporation  may  participate  in 
the  deliberations  and  actions  of  the  board.  Frequently  the 
board  is  increased  far  beyond  the  needs  of  management  in 
order  to  secure  names  that  will  attract  investors  and  add 
to  the  apparent  financial  stability  of  the  corporation  or 
benefit  it  in  other  ways. 

If  the  number  of  directors  is  made  too  large  it  is  difficult 
to  secure  a  quorum,  meetings  are  apt  to  become  infrequent  and 
perfunctory,  the  members  of  the  board  do  not  keep  in  touch 
with  its  business,  and  some  further  device  must  be  resorted  to 


122  THE    CHARTER. 

for  the  real  conduct  of  the  business.  Under  such  circumstances 
the  management  may  be  left  in  an  irregular  way  to  the  officers 
and  a  few  actively  interested  directors;  usually,  however,  the 
difficulty  is  met  by  the  appointment  of  an  executive  committee, 
to  which  is  sometimes  added  a  finance  committee  and  upon  oc- 
casion other  special  committees.  These  committees  then  exer- 
cise the  powers  of  management  that  usually  pertain  to  the 
board.  (See  §  no  and  Chap.  XXVI,  Standing  Committees.) 
For  the  business  operations  of  an  ordinary  corporation  a 
board  of  five  or  seven  members — three  or  four,  respectively, 
forming  a  quorum — is  far  better  than  a  larger  board  in  nomi- 
nal control,  but  with  special  committees  doing  the  real  work. 

§  107.  Authority. 

The  stockholders  are  the  owners  of  the  corporate  property, 
but  the  direct,  active  and  immediate  control  rests  with  the 
board  of  directors.  The  authority  of  the  board  exists  under 
the  common  law,  extends  to  all  subjects  connected  with  the 
management  of  the  corporate  affairs,  and,  unless  in  some  way 
restricted,  is  practically  supreme.  Its  actions  in  the  conduct 
of  the  corporate  business  cannot  be  questioned  or  interfered 
with  by  the  stockholders  unless  in  case  of  gross  mismanagement 
or  actual  fraud.  As  far  as  the  corporate  management  is  con- 
cerned, the  stockholder's  position  is  but  little  more  than  that 
of  an  interested  spectator. 

If  such  unrestrained  power  in  the  hands  of  the  board  is 
considered  undesirable,  it  may  usually  be  restricted  by  charter 
provision  or  by-law  regulations.  In  a  few  states  certain  re- 
strictions— and  in  some  cases  extensions — of  the  power  of  di- 
rectors are  found  in  the  statutes. 

Where  special  charter  provisions  are  permissible,  restric- 
tions upon  the  power  of  the  board  should  be  incorporated  in  the 
charter.  If  this  is  not  possible  they  may  usually  be  embodied 
in  the  by-laws,  where  they  are  equally  effective  but  of  much 
less  stability,  as  by-law  provisions  are  easily  changed. 

By  either  of  these  methods  the  power  of  the  board  to  incur 


THE    BOARD    OF    DIRECTORS.  123 

obligations  may  be  limited ;  their  power  to  sell  the  assets  of  the 
corporation  may  be  restricted;  it  may  be  required  that  two- 
thirds  or  other  proportion  of  the  entire  number  must  concur 
in  all  expenditures  above  a  certain  amount;  the  payment  of 
excessive  salaries  may  be  prohibited ;  expenditures  within  a  cer- 
tain period  may  be  limited,  and  many  other  restrictions,  de- 
pending upon  the  particular  conditions,  may  be  imposed.  (See 
§§  116,  117,  181,  236  and  243.) 

§  108.  Power  to  Pass  By-Laws. 

The  board  of  directors  have  no  power  to  pass  by-laws,  or 
to  amend  existing  by-laws,  unless  expressly  authorized  thereto 
by  the  statute  law,  the  charter  of  the  corporation,  or  its  by- 
laws. Where  special  provision  cannot  be  included  in  the  char- 
ter, the  only  method  of  giving  the  directors  power  to  amend 
the  by-laws  is  by  express  by-law  provision.  The  stockholders 
may  legally  delegate  their  power  in  this  manner. 

It  may  be  advisable  that  the  board  shall  have  power  to  pass 
additional  by-laws  to  meet  new  situations  and  emergencies  as 
they  arise,  and  this  power  may  be  given  them  by  an  authoriza- 
tion to  supplement  the  by-laws  adopted  by  the  stockholders. 
This  is  as  far  as  is  prudent.  To  place  unrestricted  power  to 
make  and  amend  the  by-laws  in  the  hands  of  the  board  would 
seem  a  dangerous  and  unnecessary  removal  of  one  of  the  most 
important  safeguards  of  the  corporate  form. 

In  the  smaller  corporations  where  a  stockholders'  meeting 
may  be  readily  called  in  case  of  an  emergency,  there  would 
seem  to  be  no  real  object  or  advantage  in  giving  the  board  any 
power  whatsoever  over  the  by-laws.  In  the  larger  corpora- 
tions the  power  should  only  be  granted  with  caution  as  one  that 
is  of  but  occasional  utility,  and  that  may  be  used  to  the  disad- 
vantage of  the  general  corporate  interests.  (See  §  128.) 

§  109.  Classification. 

The  classification  of  directors  in  such  manner  that  but  a 
portion  of  the  board  is  elected  at  any  one  annual  meeting,  is  at 


124  THE    CHARTER. 

'times  a  convenient  and  advantageous  arrangement.  Its  object 
is  to  prevent  the  violent  alteration  of  policy  which  might  occur 
should  the  entire  board  be  changed  at  one  time,  and  also  to  ren- 
der the  selection  of  desirable  members  more  probable  by  lessen- 
ing the  number  to  be  elected  at  any  particular  election. 

It  is  to  be  noted  that  the  classification  of  directors  is  but 
seldom  necessary  where  cumulative  voting  prevails,  as  the 
sudden  change  of  the  entire  board  that  may  result  from  a  pass- 
ing of  the  control  is  then  hardly  possible.  Also  in  the  smaller 
corporations  such  classification  is  but  rarely  necessary  and  is 
seldom  adopted. 

The  most  common  classification  of  directors  is  the  division 
of  the  board  into  three  classes  equal  in  number,  each  class 
holding  for  three  years,  and  one  class  being  elected  each  year. 
Under  this  plan  three  years  is  required  for  a  complete  change 
of  the  personnel  of  the  board. 

Classification  of  directors  is  attainable  in  almost  every  state. 
Where  permissible,  such  classification  should  be  provided  for 
in  the  charter.  Where  special  provisions  are  not  allowed  in 
the  charter,  it  may  usually  be  secured  by  by-law  provision. 
Unless  actually  prohibited  by  the  statutes  or  precluded  by  impli- 
cation, it  would  be  lawful  to  provide  for  such  classification  by 
either  charter  or  by-law  provision. 

It  is  unusual  to  provide  for  more  than  three  classes  of  di- 
rectors, and  such  classified  board  should  preferably  consist  of 
some  such  number,  as  three,  nine  or  fifteen,  permitting  three 
equal  divisions.  The  classes  might  be  made  unequal,  that  is, 
if  the  board  consisted  of  eleven  members,  three  might  be  elected 
one  year,  four  the  next  year  and  four  the  third.  Such  arrange- 
ment is,  however,  not  common. 

Upon  the  organization  of  a  corporation  with  a  classified 
board  the  whole  number  of  directors  would  usually  be  elected 
at  once,  the  term  or  class  of  each  director  being  decided  by 
some  agreed  method.  For  instance,  in  a  board  of  nine  mem- 
bers, divided  into  three  equal  classes,  the  three  directors  re- 
ceiving the  greatest  number  of  votes  might  constitute  the 


THE    BOARD    OF    DIRECTORS.  125 

longest  term  class,  the  three  receiving  the  next  highest  number 
of  votes  constitute  the  class  for  the  intermediate  term,  and  so 
on.  (See  §  153.) 

It  is  to  be  noted  that  the  stability  of  management  sought 
by  classification  of  directors  may  be  secured,  and,  at  times, 
even  more  efficiently  and  conveniently  by  the  creation  of  a 
voting  trust.  This  subject  is  considered  in  Chapter  XXXV, 
"  Voting  Trusts." 

§110.  Standing  "Committees. 

The  board  of  directors  is  the  managing  body  of  a  corpora- 
tion and  supposed  to  be  in  direct  charge  of  its  affairs.  When 
the  board  is  of  moderate  size  this  direct  supervision  is  usually 
exercised,  but  when  the  directors  are  numerous  it  is  not  always 
practicable,  and  standing  committees  are  then  usually  em- 
ployed. 

These  committees  are  appointed  or  elected  in  such  manner 
as  may  be  prescribed  by  charter  or  by-laws,  must  be  composed 
of  members  of  the  board  of  directors,  and,  subject  to  the  pro- 
visions by  which  they  are  created  and  empowered,  usually  exer- 
cise all  the  powers  of  the  board  in  their  respective  fields. 

Any  necessary  number  of  these  committees  may  be  ap- 
pointed, but  they  are  usually  limited  to  two,  the  executive  com- 
mittee and  the  finance  committee,  the  first-named  committee 
exercising  its  powers  over  the  general  affairs  of  the  corporation, 
while  the  powers  of  the  last-named  committee  are  usually  con- 
fined to  matters  relating  to  finance.  (See  Chap.  XXVI,  Stand- 
ing Committees.) 


CHAPTER  XIX. 
SPECIAL    PROVISIONS. 


§  in.  General. 

The  first  general  laws  relating  to  incorporation  were  harsh. 
Plurality  of  purpose  was  not  allowed,  the  privileges  granted 
were  few  and  all  corporations  were  to  be  organized  and  oper- 
ated on  exactly  the  same  lines.  But  one  mold  was  provided, 
and  if  this  did  not  happen  to  fit  the  needs  of  any  particular 
corporation,  relief  could  only  be  had  by  recourse  to  a  special 
charter  or  enabling  act. 

These  narrow  and  unnecessary  limitations  were  slowly  and 
grudgingly  relaxed,  but  no  marked  advance  was  made  in  cor- 
porate legislation  until  New  Jersey  recognized  the  necessity  of 
greater  freedom  and  flexibility  in  this  direction  and  the  very 
material  advantages  that  might  accrue  to  the  state  itself  from 
more  liberal  corporate  legislation.  Her  legislators  then  pro- 
ceeded to  remodel  the  bare  laws  then  existing,  so  as  to  allow 
a  plurality  of  purposes,  all  proper  special  powers  and  a  freedom 
and  convenience  not  theretofore  enjoyed  by  corporations 
formed  under  general  laws.  To  this  politic  concession  to  the 
reasonable  business  demands  of  the  times  is  principally  due  the 
repute — and  resulting  revenue — New  Jersey  now  enjoys  as  a 
state  for  incorporation. 

The  principal  statute  by  which  this  greater  scope  and  free- 
dom of  action  was  granted  to  New  Jersey  corporations  is  as 
follows : 

"  The  certificate  of  incorporation  may  also  contain 
any  provision  which  the  incorporators  may  choose  to 
insert  for  the  regulation  of  the  business,  and  for  the 
conduct  of  the  corporation,  and  any  provisions  creating, 
defining,  limiting  and  regulating  the  powers  of  the  cor- 

126 


SPECIAL    PROVISIONS.  127 

poration,  the  directors  and  the  stockholders,  or  any  class 
or  classes  of  stockholders;  provided  that  such  provision 
be  not  inconsistent  with  this  act."  Paragraph  VII,  sec- 
tion 8,  General  Corporation  Law  of  New  Jersey. 

This  statute  enables  the  incorporators  to  secure  through 
charters  granted  under  the  general  laws,  powers,  privileges  and 
regulations  formerly  only  possible  under  special  charters.  This 
statute  has  been  followed  in  Delaware,  to  a  certain  extent  in 
New  York,  and,  with  more  or  less  variations,  in  a  number  of 
other  states. 

In  those  states  in  which  special  charter  provisions  are  not 
allowed,  many  of  the  desired  powers,  restrictions  or  regulations 
may  be  obtained  through  by-law  provisions.  In  some  in- 
stances this  may  be  done  effectively  by  proper  arrangement, 
but  usually  the  by-laws  may  be  amended  or  repealed  with  com- 
parative ease,  and  their  provisions  do  not  always  have  the  nec- 
essary permanence.  (See  Part  IV,  "  By-Laws.") 

Where  the  statutes  do  not  permit  special  charter  provisions, 
and  desired  provisions  cannot  be  properly  or  permanently  in- 
cluded in  the  by-laws,  the  only  recourse  is  incorporation  in 
some  more  liberal  state  where  such  provisions  are  allowable. 
The  corporation  would  thereafter  operate  in  its  own  state  as  a 
foreign  corporation.  Outside  incorporation  for  such  a  pur- 
pose would  only  be  justified  where  the  special  provisions  ob- 
tained thereby  were  of  considerable  importance.  (See  Chap. 
IV,  Where  to  Incorporate.) 

§  112.  Usual  Objects. 

Under  the  head  of  special  provisions  come  many  of  the 
features  already  discussed,  such  as  cumulative  voting,  classifi- 
cation of  stock,  classification  of  directors  and  limitations  of 
the  directors'  power  of  incurring  obligations.  In  addition 
many  other  provisions  of  only  individual  corporate  application 
might  be  included,  as  limitations  on  the  voting  power,  limita- 
tions on  salaries  and  provisions  authorizing  a  reserve  fund  or 
the  accumulation  of  operating  capital. 


128  THE    CHARTER. 

The  variation  of  the  statute  laws  as  affecting  special  pro- 
visions is  wide,  as,  for  instance,  in  New  Jersey  by  charter  pro- 
vision the  directors  may  be  empowered  to  alter,  amend  or  re- 
peal by-laws,  while  in  New  York  the  exact  power  of  the  board 
as  to  by-laws  is  laid  down  in  the  statute  law  and  cannot  be 
denied  or  modified  in  any  way  by  charter  provisions.  Also 
in  New  Jersey  the  directors  may  be  empowered  by  the  charter 
to  mortgage  any  or  all  of  the  corporate  property  without  con- 
sulting the  stockholders ;  but  in  New  York  the  corporate  prop- 
erty may  only  be  mortgaged  with  the  consent  of  two-thirds  of 
the  stockholders  of  the  corporation,  and  any  charter  provision 
to  the  contrary  would  be  absolutely  non-effective.  On  ac- 
count of  this  wide  difference  the  statutes  of  the  state  of  incor- 
poration must  be  consulted  when  special  provisions  are  under 
consideration. 

§  113.  Cumulative  Voting. 

Cumulative  voting  is  frequently  employed  as  a  protection 
to  minority  interests.  By  its  action  any  material  minority  is 
assured  representation  on  the  board  of  directors.  As  its  name 
indicates,  the  system  depends  upon  a  cumulation  or  concentra- 
tion of  votes.  Under  its  provisions,  the  owner  of  a  share  of 
stock  may  at  any  election  of  directors,  cast  one  vote  for  each 
director  to  be  elected,  or  may  cast  the  same  number  of  votes 
for  one  director,  or  may  distribute  such  votes  among  two  or 
more  as  he  sees  fit.  That  is,  if  the  total  number  of  directors 
to  be  elected  were  seven,  the  owner  of  one  share  of  stock  might 
cast  one  vote  for  each  of  the  seven  directors,  or  might  cast 
seven  votes  for  one  director,  or  cast  four  votes  for  one  director 
and  three  for  another,  or  apportion  his  seven  votes  in  any 
other  way  among  the  candidates. 

Under  this  arrangement  even  a  small  minority,  if  properly 
combined,  may  secure  representation  on  the  board.  At  times 
this  representation  becomes  of  much  importance.  If  the  mi- 
nority are  not  represented  they  may  be  debarred  from  informa- 
tion and  knowledge  of  what  the  majority  propose  to  do,  and 


SPECIAL    PROVISIONS.  129 

action  may  be  taken  which  cannot  be  undone,  but  which  the 
minority  might  have  prevented  by  injunction  or  other  means 
had  they  been  informed.  Also  the  mere  presence  of  a  capable 
minority  representative  on  the  board  prevents  many  abuses  of 
power  that  might  otherwise  occur.  For  this  and  other  rea- 
sons, cumulative  voting  is,  from  the  minority  standpoint,  al- 
ways a  wise  provision,  and  occasionally  becomes  a  matter  of  the 
most  vital  importance. 

Cumulative  voting  may,  in  many  states,  be  secured  by  in- 
clusion in  the  charter.  In  Pennsylvania,  South  Dakota,  West 
Virginia  and  some  other  states  it  is  mandatory  without  refer- 
ence to  any  charter  provisions.  In  a  few  states,  it  is  doubtful 
whether  the  provision  would  be  allowed  in  the  charter,  or 
would  be  effective  if  included.  Generally  speaking,  the  method 
is  fair  and  of  great  advantage  to  the  minority  interests.  (See 
§231  for  full  discussion  of  this  subject.) 

§  114.  Classification  of  Stock. 

Where  allowable  by  statute,  stock  may  be  classified  in  many 
ways.  The  most  usual  of  these  are  the  division  of  the  capitali- 
zation into  common  and  preferred  stock,  division  of  the  pre- 
ferred stock  into  classes,  as  first,  second,  etc.,  division  of  the 
common  stock  into  classes,  each  class  electing  a  due  proportion 
of  the  directors,  etc.  (See  Chap.  VII,  The  Stock  System.) 

The  division  into  common  and  preferred  stock  and  the  indi- 
cated division  of  preferred  stock  may  be  secured  by  charter 
provision  in  nearly  every  state  in  the  Union,  together  with  such 
other  proper  classifications  of  the  preferred  stock  as  may  be 
desired. 

The  division  of  the  common  stock  into  voting  classes,  and 
the  many  other  classifications  occasionally  employed,  may  usu- 
ally be  secured  by  special  charter  provision  where  such  pro- 
visions are  allowed.  (See  §§  49,  98,  232  and  252.) 

Where  permitted  by  the  statutes,  the  classification  of  stock 
may  be,  and  occasionally  is,  carried  into  wide  variations. 
Sometimes  a  portion  of  the  stock  will  be  denied  the  voting 
right  entirely,  or  will  be  prohibited  from  voting  on  certain 


130  THE    CHARTER 

questions.  Certain  stock  may  be  debarred  from  participation 
in  dividends  for  a  stated  period.  In  New  York,  a  peculiar 
partly  paid  stock  may  constitute  a  part  of  the  issue,  drawing 
dividends  only  upon  the  amount  actually  paid. 

These  unusual  arrangements  are  only  desirable  under  ex- 
ceptional circumstances.  Generally  they  are  to  be  avoided  as 
being  complicated,  unnecessary  and  at  times  of  uncertain  result. 

§  115.  Corporate  Stockholding. 

At  common  law  a  corporation  cannot  hold  stock  in 
another  corporation.  Though  the  law  was  not  formulated 
with  any  such  intent  its  practical  effect  was  to  render  the 
formation  of  trusts  and  combinations  extremely  difficult, 
and,  in  many  cases,  impossible. 

New  Jersey  was  the  first  state  to  modify  the  law  in  this 
direction,  and,  under  her  present  statutes,  any  corporation 
may  hold  the  stock  or  the  securities  of  another.  New  York 
followed  New  Jersey  to  the  extent  of  allowing  this  right 
where  provision  was  made  therefor  in  the  charter.  Many 
other  states  have  by  recent  enactment  granted  much  latitude 
in  this  same  direction. 

The  right  is,  at  times,  a  very  valuable  one  and  in  those 
states  where  allowed  a  provision  authorizing  the  holding  of 
corporate  securities  by  the  corporation  is  usually  included 
in  the  charter.  (See  Chap.  XXXIX,  Holding  Corpora- 
tions.) 

§  1 1 6.  Limitations  on  Indebtedness. 

In  a  large  proportion  of  the  cases  where  corporations 
are  wrecked,  the  result  is  brought  about  by  the  directors' 
abuse  of  the  power  to  incur  debt.  In  those  states  where 
the  power  of  the  directors  in  this  respect  may  be  limited 
by  charter  provision,  such  restriction  is,  on  occasion,  very 
desirable. 

Under  some  circumstances  it  may  be  advantageous  to 
fix  an  absolute  limit  beyond  which  the  directors  have  no 
power  to  obligate  the  corporation.  Or  it  may  be  provided 


SPECIAL   PROVISIONS.  181 

that  if  the  directors  exceed  a  certain  sum,  they  shall  be 
held  personally  liable  for  such  excess.  Or  it  may  be  provided 
that  they  shall  not  enter  into  any  single  contract  involving 
obligations  over  a  certain  amount.  Or  it  may  be  provided 
that  obligations  beyond  a  certain  amount  shall  only  be 
incurred  with  the  affirmative  vote  of  two-thirds,  or  other 
proportion  of  the  whole  board,  or  shall  only  be  undertaken 
after  authorization  thereto  by  due  resolution  of  the  stock- 
holders. 

Whatever  the  plan  adopted  it  should  be  carefully  con- 
sidered and  adapted  to  the  special  situation,  and  the  limita- 
tions should  not  be  so  low  as  to  amount,  or  so  narrow  in 
application,  as  to  interfere  with  the  ordinary  operations  of  the 
business.  The  abuse,  not  the  use,  of  the  debt  incurring 
power  is  to  be  prevented.  (See  §§  107,  181,  236  and  243.) 

§  117.  Limitations  on  Salaries. 

The  diversion  of  profits  by  excessive  salaries  is  a  not 
uncommon  method  of  draining  the  corporate  treasury  and 
preventing  the  payment  of  proper  dividends.  If  not  prop- 
erly guarded  against  at  the  time  of  the  organization  of  the 
corporation,  such  practice  may  be  extremely  difficult  to  correct 
or  prevent  later.  (Raynolds  vs.  Diamond  Mills  Paper  Co.,  60 
Atl.  Rep.,  941,  1905.) 

Limitations  on  salaries  should  not  be  made  too  narrow 
or  too  inflexible.  Good  management  is  an  absolutely  indis- 
pensible  element  of  success  and  any  limitations  should 
not  prevent  fair  salaries,  with  a  possibility  of  more  liberal 
payment  when  demanded  by  the  welfare  of  the  company, 
or  justified  by  the  excellence  of  the  management. 

This  flexibility  of  restriction  may  be  provided  for  in 
various  ways.  The  charter  provision  may  merely  require 
that  salaries  be  fixed,  and  varied  thereafter  if  need  be,  by 
a  two-third  vote  of  the  entire  board.  Occasionally  the  con- 
currence of  the  entire  board  may  be  required.  Or  the  sal- 
aries of  officers  may  be  determined  each  year  at  the  stock- 
holders' annual  meeting  by  a  stated  majority  of  the  entire 


132  THE   CHARTER. 

outstanding  stock.  In  such  case  the  required  majority  may 
be  fixed  so  high  as  to  require  the  agreement  of  the  minority 
interests.  Or  it  may  be  provided  that  no  official  salary 
shall  be  increased  over  a  stated  figure,  until  a  dividend  of 
say  6  per  cent,  has  been  paid  upon  the  outstanding  stock 
for  two  or  more  years.  Or  any  salary  payments  over  a  cer- 
tain minimum  might  be  made  absolutely  dependent  each 
year  upon  the  payment  of  a  certain  dividend  for  the  pre- 
vious year. 

It  is  to  be  noted  that  where  the  ease  of  alteration  is  not 
objectionable,  provisions  limiting  indebtedness  and  salaries 
are  usually  included  in  the  by-laws  instead  of  the  charter. 
Here  they  may  be  modified  as  the  circumstances  demand, 
whereas  in  the  charter  they  may  only  be  altered  by  formal 
amendment  of  that  instrument.  But  to  protect  the  minority 
effectually  such  limitations  must  be  inserted  in  the  charter. 
(See  §§107,  181,  236  and  243.) 

§  1 1 8.  Sundry  Provisions. 

Many  other  provisions  will  on  occasion  be  incorporated 
in  the  charter.  Especially  in  the  incorporation  of  a  partner- 
ship or  the  re-organization  or  consolidation  of  corporations, 
special  provisions  are  often  necessary  in  protection  of  the 
varying  interests  as  a  pre-requisite  to  the  proposed  arrange- 
ment. (See  Chap.  XXXVIII,  Incorporating  a  Partnership.) 

It  is  essential  that  these  provisions  shall  not  go  counter 
to  any  law  regulating  corporations  and  important  that  they 
be  not  such  as  to  involve  the  corporation  in  any  subsequent 
deadlock  or  entanglement.  The  death  of  parties,  sale  of 
stock  to  strangers,  change  of  industrial  conditions  and  other 
mutations  may  make  apparently  desirable  arrangements 
exactly  the  reverse.  It  is  not  always  possible  to  amend  a 
charter  and  if  there  is  any  doubt  as  to  the  expediency,  or 
effect  of  any  particular  provision,  it  should  be  brought  into 
the  by-laws  rather  than  the  charter.  Then  if  found  undesir- 
able, it  may  usually  be  amended  or  altered  by  a  mere  majority 
vote  of  the  stockholders. 


CHAPTER  XX. 
EXECUTION    AND    FILING    OF    CHARTER. 


§  1 19.  General. 

In  each  state  the  essential  features  of  the  charter  are  pre- 
scribed by  its  corporation  laws.  In  many  states  a  form  of 
charter  application  is  prepared  by  the  state  authorities  and  will 
be  furnished  by  them  on  application.  Where  this  is  not  done 
the  forms  are  usually  prepared  by  law  stationers  and  kept  on 
sale.  Care  should  be  exercised  in  the  use  of  these  prepared 
forms  or  undesirable  features  may  be  inadvertently  adopted. 
Most  of  the  published  forms  for  some  states — notably  those  for 
New  Jersey  and  Delaware — include  the  objectionable  provi- 
sions of  the  trust  charters  whereby  the  minimum  of  power  is 
left  with  the  stockholders  and  the  rights  of  the  minority  are 
reduced  to  their  lowest  terms.  Such  features  while  possibly 
adapted  to  trust  management,  are  not  usually  desirable  for  an 
ordinary  corporation.  (See  Form  2,  Delaware  Charter.) 

If  any  of  these  prepared  forms  have  received  the  sanction 
or  approval  of  the  state  authorities,  such  forms  should  either  be 
used  or  be  closely  followed.  To  depart  materially  therefrom 
is  to  invite  objection,  which  may  at  times  be  captious  and  in 
any  case  will  cause  delay  and  trouble.  The  authorities  cannot 
be  deemed  unreasonable  in  their  preference  for  these  forms 
which  have  been  passed  upon,  with  which  they  are  familiar,  and 
which,  when  used,  enable  them  the  more  readily  to  determine 
the  legality  and  correctness  of  an  application. 

In  addition  to  the  usual  provisions  of  the  charter,  any 
special  provisions  decided  upon  will  be  included  and  the  charter 
application  is  then  ready  for  the  final  formalities.  These  con- 
sist of  its  signing,  acknowledgment  and  filing. 

133 


184  THE    CHARTER. 

These  final  formalities  are  in  a  general  way  similar  all  over 
the  country,  but  as  the  matter  is  one  of  statutory  regulation 
the  laws  of  the  particular  state  must  be  consulted  for  details. 

§  1 20.  Signing  and  Acknowledgment. 

Each  of  the  incorporators  must  sign  and  acknowledge  the 
charter  application.  If  there  are  but  three  incorporators  and 
they  come  together  for  the  signing  and  acknowledgment  of 
the  instrument,  the  formality  is  a  simple  one.  The  three  ac- 
knowledgments are  taken  at  the  one  time  and  one  notarial 
certificate  serves  for  all.  If  the  notarial  officer  who  acts  in 
the  matter  calls  on  the  incorporators  at  their  offices  or  resi- 
dences and  takes  their  several  acknowledgments,  the  one  nota- 
rial certificate  will  still  serve.  If,  however,  the  incorporators 
are  numerous,  live  in  other  states,  or  for  any  other  reason 
cannot  be  easily  reached  or  assembled,  separate  notarial  cer- 
tificates may  be  necessary  for  each  acknowledgment.  A  party 
to  a  transaction  cannot  act  as  notary  therein.  (People,  etc.,  vs. 
Commissioners,  105  App.  Div.,  N.  Y.,  273,  1905.) 

These  acknowledgments  may  usually  be  taken  by  a  notary 
public,  commissioner  of  deeds,  justice  of  the  peace,  or  other 
officer  authorized  to  take  acknowledgments  to  deeds.  If  taken 
in  another  state,  a  certificate  may  be  necessary  as  to  the  due 
appointment  and  authority  of  the  officer  by  whom  the  acknowl- 
edgment is  taken.  The  whole  matter  is  one  of  statutory  regu- 
lation which  must  be  closely  followed.  The  statutes  are  in 
most  cases  explicit  as  to  the  details  of  acknowledgment. 

In  addition  to  the  usual  execution  by  the  incorporators,  in 
some  states  it  is  necessary  to  secure  the  approval  of  the  pro- 
posed incorporation  by  some  designated  court,  or  by  a  judge 
of  such  court,  as  one  of  the  preliminaries  to  filing. 

§  121.  Filing. 

The  technical  details  of  filing  the  charter  application  vary 
to  some  extent  in  the  different  states.  In  some  the  application 
is  sent  directly  to  the  Secretary  of  State,  accompanied  by  the 


EXECUTION    AND    FILING    OF    CHARTER.  135 

prescribed  fees.  In  others,  the  application  must  be  sent  direct 
to  the  Secretary  of  State,  but  the  filing  fees  are  paid  the  State 
Treasurer,  who  must  certify  to  the  Secretary  that  this  has  been 
done  before  the  charter  will  be  filed.  Again  in  some  states 
the  charter  must  be  filed  with  the  Clerk  of  the  County  Court 
in  the  home  county  of  the  corporation,  before  filing  with  the 
Secretary  of  State ;  elsewhere  the  charter  must  be  filed  with  the 
Clerk  of  the  County  Court  after  its  filing  with  the  State  Secre- 
tary. 

The  treatment  accorded  the  charter  applications  by  the  filing 
officials  also  varies  in  the  different  states.  In  some,  these  offi- 
cials consider  that  the  insertion  of  unauthorized  or  improper 
powers  gives  no  legal  authority,  and  that  they  are  not  called 
upon  to  decide  the  legal  effect  of  the  verbiage  employed,  and, 
in  accordance  with  these  views,  accept  any  powers  or  purposes 
not  openly  in  conflict,  or  glaringly  outside  the  intent  of  the 
law. 

In  others,  the  authorities  scrutinize  the  application  in  detail, 
and  if  its  purposes  and  powers  seem  to  exceed  the  statutory 
limits,  the  Secretary  of  State  will  decline  to  file  the  application. 
In  such  case  the  application  is  returned  with  an  explanation  or 
statement  of  the  reasons  for  its  refusal.  At  times  the  state 
authorities  clearly  exceed  their  authority  in  passing  upon  the 
legality  of  the  indicated  powers  of  a  charter  application.  In 
such  case  if  the  matter  were  of  sufficient  importance  and  the 
delay  not  too  serious,  the  courts  might  be  invoked  and  the 
points  in  question  be  decided  by  competent  authority.  Gen- 
erally, however,  the  importance  of  the  matter  will  not  justify 
such  proceedings,  and,  if  the  official  ruling  cannot  be  changed, 
the  purposes  or  other  matters  in  question  must  be  either  omitted 
or  so  changed  as  to  meet  the  views  of  the  authorities. 

If  any  required  alteration  in  an  executed  charter  is  on  some 
non-essential  point,  and  all  the  incorporators  agree  thereto,  it 
is  not  usually  necessary  to  redraft  and  re-execute  the  entire 
instrument.  The  correction  may  be  made  in  the  original  in- 
strument and  the  document  be  then  returned  for  acceptance  in 
its  corrected  form. 


136  THE    CHARTER. 

If,  however,  the  alteration  be  material,  the  better  practice 
is  to  have  the  instrument  redrawn  and  executed  afresh  by  the 
incorporators.  If,  however,  a  material  alteration  were  made 
in  the  instrument  without  any  re-execution,  but  with  the  con- 
sent or  subsequent  acceptance  of  the  incorporators,  and  the 
charter  so  altered  were  duly  allowed  and  filed  by  the  state  offi- 
cials, it  is  not  probable  that  it  could  later  be  successfully  at- 
tacked. 

In  some  states,  pursuant  to  the  approved  application,  a  char- 
ter is  issued  under  the  seal  of  state  granting  to  the  corporation 
the  desired  rights,  powers  and  privileges.  In  other  states  the 
charter  application  itself  changes  its  nature,  and,  as  soon  as 
filed,  becomes  the  charter  of  the  then  authorized  corporation. 
Its  form  is  not  changed,  but  its  force  is,  and  it  is  then  an 
authorization  from  the  state  for  the  organization  of  the  corpo- 
ration with  all  the  powers,  privileges  and  characteristic  features 
detailed  in  the  one-time  application. 

§  122.  Certified  Copies. 

In  some  states  the  Secretary  of  State  issues  a  duly  certified 
charter  under  the  great  seal  of  state  as  part  of  the  regular 
routine.  In  others,  the  Secretary  merely  notifies  the  party 
filing  the  application  that  it  has  been  accepted  and  filed,  this 
accepted  application  then  becoming  the  charter  of  the  corpora- 
tion. In  this  latter  case  the  Secretary  will  at  any  time  upon 
payment  of  the  legal  fees  furnish  certified  copies  of  the  accepted 
application,  or  charter,  which  are  due  legal  evidence  of  incor- 
poration. 

Where  certified  copies  of  the  charter  are  to  be  recorded  with 
the  local  authorities,  they  must,  of  course,  be  secured  from  the 
state  authorities  as  part  of  the  organization  routine.  Beyond 
this,  the  possession  of  a  certified  copy  of  the  charter  is  of  no 
importance,  save  very  rarely  in  cases  of  litigation,  and,  on 
occasion,  for  its  effect  on  interested  parties,  or  parties  to  be 
interested  in  the  corporation.  It  is  usual,  however,  to  secure 
and  preserve  a  certified  copy  among  the  archives  of  the  corpo- 
ration. 


CHAPTER  XXL 
AMENDMENT    OF    CHARTER. 


§  123.  General. 

Charter  amendments  are  usually  the  result  of  a  too  hasty 
preparation  of  the  original  instrument.  Sometimes  they  are 
necessitated  by  changed  conditions.  At  all  times  they  are 
troublesome  and  to  some  extent  expensive.  They  may  be  made 
either  before  or  after  the  completion  of  the  corporate  organiza- 
tion. 

New  Jersey,  with  its  usual  accommodating  recognition  of 
possible  corporate  needs,  permits  the  amendment  of  a  charter 
by  a  very  simple  process  before  the  corporate  organization  is 
completed.  In  this  way  new  conditions  may  be  provided  for 
and  the  cruder  defects  of  a  new  charter  may  be  easily  remedied. 
Thereafter,  as  in  other  states,  the  charter  may  be  amended  only 
by  the  regular  procedure  for  such  cases  provided. 

§  124.  Subject  Matter. 

Any  provisions  may  be  brought  into  a  charter  amendment 
that  might  have  been  brought  into  the  original  charter.  As 
soon  as  allowed  the  provisions  of  such  amendment  become  to 
all  legal  intents  part  of  the  original  charter  and  as  permanently 
binding  on  the  corporation. 

When  an  amendment  has  been  made,  such  amendment  and 
the  original  charter  together  constitute  the  working  charter 
of  the  corporation,  the  amendment  taking  precedence  over  and 
modifying  the  original  charter  in  all  points  of  difference. 

§  125.  Procedure. 

The  procedure  for  the  amendment  of  a  charter  is,  in  each 
state,  prescribed  by  law.  There  is  but  little  uniformity  in  the 

137 


138  THE    CHARTER. 

different  states.  In  New  York,  for  instance,  the  statutory 
procedure  varies  with  the  nature  of  the  amendment.  To  change 
the  name  of  the  corporation,  application  must  be  made  to  desig- 
nated courts.  To  change  the  number  of  directors,  application 
must  be  made  to  the  state  officials. 

Generally,  an  amendment  of  the  charter  requires  a  duly 
called  meeting  of  the  stockholders,  at  which  a  two-thirds  ma- 
jority of  the  stock  interests  outstanding  must  vote  in  favor 
of  the  proposed  changes.  The  amendment,  duly  evidenced, 
as  to  the  stockholders'  authorization,  must  usually  be  filed  in 
the  same  offices  and  with  the  same  formalities  as  the  original 
charter. 

In  st>me  states  advertisement  must  be  made  for  a  prescribed 
time  before  any  such  amendment  goes  into  effect.  The  pro- 
portion of  the  stock  vote,  the  notices  to  be  given,  and  the  other 
formalities  also  vary  in  the  different  states.  In  Delaware  a 
bare  majority  have  power  to  amend  the  charter. 


PART  IV.-THE  BY-LAWS. 


CHAPTER  XXII. 

« 

GENERAL    CONSIDERATIONS. 


§  126.  Function  of  By-Laws. 

A  modern  corporation  is  regulated,  first,  by  the  general  laws 
under  which  it  operates ;  second,  by  the  provisions  of  its  char- 
ter, and,  third,  by  its  by-laws.  When  the  incorporators  meet 
pursuant  to  the  authorization  of  their  charter  for  organiza- 
tion, both  the  general  laws  and  the  charter  exist  for  the  guid- 
ance of  the  new  corporation.  To  these  must  be  added  the  by- 
laws to  provide  for  those  details  of  organization,  administra- 
tion and  business  routine  not  covered  by  the  laws  nor  provided 
for  in  the  charter.  This  is  the  first  and  most  important  func- 
tion of  the  by-laws. 

In  addition  to  this  function,  the  by-laws  are  also  usually 
so  drawn  as  to  constitute  a  systematic  statement  of  the  more 
important  working  details  of  both  the  general  law  and  the 
charter.  This  is  not  done  with  any  idea  of  adding  to  the  bind- 
ing force  of  the  requirements  of  these  higher  authorities,  but 
merely  as  a  restatement,  the  by-laws  being  thereby  rendered  a 
more  complete  code  for  the  guidance  of  the  corporate  officials 
and  stockholders. 

This  use  of  the  by-laws  is  customary  and  of  considerable 
importance,  insuring  the  observance  of  those  statutory  and 
charter  provisions  which  if  not  in  such  accessible  form,  might 
be  overlooked  or  forgotten. 

139 


140  THE  PBY-LAWS. 

§  127.  Subject  Matter. 

There  is  usually  no  law,  save  the  law  of  necessity,  com- 
pelling a  new  corporation  to  adopt  by-laws.  Its  operation 
without  by-laws  would,  however,  be  practically  impossible — 
so  much  so  that  the  law  confers  the  power  to  make  by-laws 
and  takes  it  for  granted  that  this  right  will  be  exercised.  Pro- 
visions for  the  regulation  of  the  corporation  are  found  both  in 
the  statute  law  and  the  charter,  but  these  are  for  the  most  part 
general  in  their  nature.  There  are  none  of  the  specific  details 
essential  for  the  proper  corporate  operation. 

Just  what  matters  should  be  provided  for  in  the  charter,  and 
what  in  the  by-laws,  is,  to  some  extent,  determined  by  the  con- 
ditions of  the  particular  corporation.  The  statutes  usually 
prescribe  certain  essential  matters  that  must  appear  in  the 
charter.  In  addition,  all  such  important  matters,  outside  the 
ordinary  routine  of  corporate  procedure,  as  are  intended  to  be 
permanent  features  of  the  organization  should  be  incorporated 
in  the  charter.  (See  Chap.  XIX,  Special  Provisions.)  The 
routine  details  of  corporate  procedure,  and  any  special  provi- 
sions which  are  not  intended  to  be  permanent,  or  which  are 
not  permissible  in  the  charter,  are  reserved  for  the  by-laws. 
Generally  speaking,  nothing  should  be  incorporated  in  the 
charter — outside  of  statute  requirements — that  may  be  as  ef- 
fectually provided  for  in  the  by-laws. 

The  by-laws,  as  has  been  stated,  also  usually  contain  many 
provisions  of  the  statute  law  and  the  charter,  which  are  re- 
peated in  the  proper  connection  in  the  by-laws  merely  that  these 
latter  may,  in  themselves,  be  a  complete  working  code.  The 
by-laws  will,  then,  contain  all  the  ordinary  working  details  of 
corporate  regulation  and  most — if  not  all — of  the  important 
statutory  and  charter  provisions  directly  affecting  the  corpora- 
tion, frequent  reference  to  the  charter  and  to  the  statutes  being 
thereby  rendered  unnecessary. 

Under  the  head  of  routine  details,  the  by-laws  should, 
in  strict  conformity  with  any  requirements  of  statutes  or 
charter,  provide  for  the  issuance  and  transfer  of  stock, 


GENERAL   CONSIDERATIONS.  141 

the  meetings  of  stockholders  and  directors,  the  election  of 
directors  and  officers  and  the  duties  and  limitations  imposed 
upon  them,  the  care  and  management  of  the  property  and 
finances  of  the  corporation,  and  the  other  incidents  of  cor- 
porate procedure  connected  with  these. 

§  128.  Power  to  Make. 

The  power  to  make  by-laws  is  one  of  the  old  common 
law  powers  enjoyed  by  corporations.  Under  the  common 
law  it  resides  in  the  stockholders  duly  assembled  in  lawful 
meeting.  It  may  be  delegated  by  them  to  the  directors,  but 
may  be  resumed  at  any  time,  and  may  only  be  exercised  by 
the  directors  under  such  limitations  as  the  stockholders  pre- 
scribe. This  power  to  make  by-laws  is  perhaps  the  most 
important  right  reserved  to  the  stockholders. 

As  has  been  stated  the  stockholders  cannot  manage  the 
affairs  of  their  corporation  directly,  but  only  through  the 
board  of  directors.  This  board  is  not  amenable  to  either 
request  or  resolution  of  the  stockholders  and  has  wide 
latitude  and  great  independent  power  in  the  management 
of  the  corporate  affairs  and  property  unless  expressly  re- 
stricted by  special  charter  or  by-law  provisions.  Special 
charter  provisions  are  of  limited  application  and  not  always 
available,  and  therefore  in  most  cases  the  wishes  of  the 
stockholders  as  to  the  management  of  their  property  and 
business  must  be  expressed  in  the  by-laws  and  can  be  effect- 
ively expressed  in  no  other  way.  For  this  reason  anything 
affecting  the  stockholders'  sole  right  to  make,  repeal  and 
amend  these  by-laws  is  a  matter  of  vital  importance. 

In  New  Jersey,  and  those  other  states  which  have 
modeled  after  her  corporation  laws,  the  charter  may  be  so 
worded  as  to  give  the  directors  power  to  make  and  amend 
by-laws.  This  gives  them  the  power  to  alter  the  regulations 
by  which  they  themselves  are  controlled.  The  expediency 
of  such  a  proviso  is  exceedingly  doubtful,  even  in  the  large 
industrial  combinations  for  whose  benefit  it  was  contrived. 


142  THE  BY-LAWS. 

Its  tendency  is  to  put  much  power  into  the  hands  of  the 
directors,  and  of  the  majority  stockholders  by  whom  such 
directors  are  elected;  and  to  correspondingly  diminish  the 
status  and  power  of  the  minority  stockholders. 

In  New  York,  the  directors  are,  by  statute  provision, 
given  the  power  to  adopt  any  desired  by-laws  not  incon- 
sistent with  those  passed  by  the  stockholders.  This  would 
seem  to  be  quite  as  far  as  it  is  safe  to  go.  It  allows  the 
directors  to  pass  necessary  by-laws  to  meet  an  emergency, 
or  some  unforeseen  condition,  and  they  are  fully  within  their 
powers  so  long  as  these  by-laws  do  not  conflict  with  the 
by-laws  adopted  by  the  stockholders.  They  cannot,  how- 
ever, remove  any  of  the  safeguards  thrown  round  the  con- 
duct of  the  business  by  the  by-laws  of  the  stockholders,  nor 
modify  them  in  any  material  respect.  They  may  act  in  har- 
mony with  what  has  gone  before,  but  cannot  alter  or  destroy. 
It  is  to  be  noted  that  such  directors'  by-laws,  until  repealed 
or  superseded  by  action  of  the  stockholders,  are  the  by-laws 
of  the  company  and  of  equal  force  with  those  adopted  by  the 
stockholders.  (See  §  108.) 

§  129.  Arrangement. 

By-laws  intended  for  a  close  corporation  with  but  few 
stockholders  and  perhaps  all  these  on  the  board  of  directors, 
may  be  simple  in  form  and  few  in  number. 

When  intended  for  a  large  corporate  combination  with 
many  plants  in  different  states,  with  hundreds  or  thousands 
of  stockholders  scattered  throughout  the  Union,  with  a 
large  directorate,  many  officers  and  numerous  managing 
committees,  an  extensive  and  comprehensive  set  of  by-laws 
is  essential. 

In  either  of  these  cases,  and  for  the  many  intermediate 
corporations,  it  is  of  much  advantage  to  have  the  by-laws 
classified  and  systematized  so  that  the  regulations  governing 
any  particular  subject  or  matter  may  be  readily  found.  In 
all  the  better  prepared  sets  of  by-laws  this  systematic  class- 


GENERAL    CONSIDERATIONS.  143 

ification  is  employed.  In  many  cases,  however,  the  by-laws 
are  hardly  more  than  a  heterogeneous  jumble  of  uncon- 
nected regulations. 

The  arrangement  of  by-laws  followed  in  the  present 
volume  under  which  the  related  provisions  are  grouped  in 
the  order  and  under  the  headings  given  below  is  used  by 
a  number  of  the  best-organized  corporations  of  the  country 
and  has  proved  very  satisfactory  in  practice. 

1.  Stock. 

2.  Stockholders. 

3.  Directors. 

4.  Standing  Committees. 

5.  Officers. 

6.  Dividends  and  Finance. 

7.  Sundry  Provisions. 

8.  Amendments. 

By-laws  from  the  simplest  to  the  most  comprehensive 
sets  may  be  readily  classified  on  these  lines.  (See  Forms  8, 
9  and  10.) 

§  130.  Preparation. 

The  adoption  of  by-laws  is  the  first  important  step  of 
corporate  organization.  It  is  essential  in  order  to  give  a 
basis  for  the  proceedings  that  follow. 

As  the  by-laws  are  needed  so  early  in  the  corporate 
existence,  they  are  customarily  prepared  in  advance  of  the 
first  meeting,  this  duty  usually  and  properly  falling  to  the 
counsel  conducting  the  organization  of  the  corporation. 

The  preparation  of  a  set  of  by-laws  for  the  usual  small 
corporation  is  a  comparatively  simple  matter.  For  the 
larger  corporations,  with  their  more  complex  and  extended 
organizations,  the  undertaking  is  much  more  difficult.  Such 
by-laws  should  be  prepared  with  nice  adaption  to  the  needs 
of  the  particular  corporation.  The  use  of  an  existing  set 
of  by-laws  as  a  basis  for  this  work  is  entirely  proper  and 
good  practice,  but  such  selected  set  should  be  carefully 


144  THE    BY-LAWS. 

studied  and  skillfully  adapted  to  the  wants  of  the  new  cor- 
poration. All  unnecessary  matter  should  be  dropped,  the 
matter  that  is  retained  be  made  to  fit  the  case  in  hand,  and 
such  new  matter  added  as  may  be  necessary  to  cover  the 
requirements. 

Too  often  the  preparation  of  the  by-laws  of  a  new  corpora- 
tion is  merely  a  wholesale  seizure  of  some  existing  set  with 
hastily  improvised  interpolations  to  meet  the  most  obvious 
needs  of  the  new  organization.  These  by-laws  may  have  been 
a  very  admirable  code  of  procedure  for  the  original  corpora- 
tion, but  so  diverted  can  hardly  fail  to  be  a  wretched  misfit  and 
prove  a  fruitful  source  of  trouble.  By-laws  so  ill-prepared 
give  seeming  grounds  for  the  demand  that  the  directors  be 
given  the  power  to  amend  by-laws  as  the  only  means  of  avoid- 
ing serious  hindrance  and  injury  to  the  business. 

§  131.  Adoption  of  First  By-Laws. 

The  formal  adoption  of  the  first  set  of  by-laws  is  accom- 
plished by  the  reading  of  each  section  and  its  adoption  by  vote, 
followed  by  the  adoption  of  the  set  as  a  whole  at  the  comple- 
tion of  the  sectional  consideration.  As  it  is  usually  impossible 
to  prepare  by-laws  at  this  first  meeting,  or  to  properly  discuss 
and  amend  a  previously  prepared  set,  the  responsibility  for  the 
by-laws  rests  almost  entirely  with  the  lawyers  to  whom  their 
preparation  is  entrusted.  As  a  matter  of  fact,  the  by-laws 
are  usually  presented  to  the  meeting  in  their  entirety,  and,  with- 
out reading  or  other  investigation  of  their  details,  are  either 
adopted  by  formal  vote,  or  accepted  by  acquiescence.  The 
legal  effect  of  such  adoption  is  the  same  as  under  the  more  for- 
mal procedure.  (See  §  192.) 


By-laws  varying  as  to  scope  and  application  are  given  in 
Chapter  XLIII  of  the  present  volume  as  Forms  8,  9,  and  10. 
As  has  been  stated,  these  by-laws  are  all  arranged  on  the  same 
general  plan,  each  subject  in  its  various  phases  being  found  in 


GENERAL    CONSIDERATIONS.  145 

the  same  relative  position  in  each  set.  The  comment  of  the 
following  chapters  conforms  to  the  same  logical  order  and  is 
intended  to  be  considered  in  connection  with  the  forms  of  by- 
laws there  given. 


CHAPTER   XXIII. 
STOCK. 


(See  Art.  I  in  Forms  8,  9  and  10.) 
§  132.  Preliminary. 

Formerly  it  was  customary  to  begin  the  by-laws  of  a  cor- 
poration with  a  section  setting  forth  the  name  of  the  corpora- 
tion and  the  amount  of  its  capital  stock.  While  there  is  no 
serious  objection  to  this,  such  facts  seem  almost  too  funda- 
mental in  their  nature  to  require  repetition  in  the  by-laws  and 
are  now  generally  omitted. 

Also  in  former  days  when  preliminary  subscriptions  to  the 
stock  of  a  corporation  were  usual,  and  in  many  cases  payable  in 
instalments,  a  by-law  provision  as  to  the  payment  of  these 
instalments  and  the  procedure  in  case  of  default  was  customary 
and  of  some  importance.  In  the  present  day,  however,  the 
formation  of  a  corporation  with  instalment  subscriptions  is 
comparatively  rare,  and  when  it  does  occur,  collection  of  the 
subscription  is  usually  provided  for  by  resolution  of  the  di- 
rectors. This  avoids  cumbering  the  by-laws  with  matter  that 
is  of  no  permanent  utility. 

The  subject  of  stock  which  is  considered  first  in  the  follow- 
ing comment  is  one  of  the  most  important  matters  of  by-law 
regulation.  In  most  of  the  states,  the  general  rules  relating  to 
the  stock  of  the  corporation,  its  certificates,  its  transfers  and 
records,  are  matters  of  statutory  regulation.  These  statutes 
should  be  summarized  and  classified  in  the  by-laws  and  such 
additional  special  regulations  brought  in  as  will  cover  the  en- 
tire working  details  of  the  subject.  No  open  question  should 

146 


STOCK.  147 

be  left  as  a  foundation  for  later  differences  of  opinion,  vexa- 
tious disputes,  and,  perhaps,  more  serious  difficulties. 

§  133.  Certificates  of  Stock. 

Every  holder  of  stock  for  which  the  corporation  has  been 
paid  in  full  is  entitled  to  a  certificate  or  certificates,  showing  the 
number  of  full-paid  shares  of  stock  held  by  him.  A  subscriber 
when  his  subscription  is  accepted,  becomes  a  stockholder  of 
the  company  and  entitled  to  vote  and  draw  dividends  if  any  are 
declared,  but  is  not  entitled  to  a  certificate  of  full-paid  stock 
until  he  has  paid  the  full  subscription  price  of  his  stock.  If 
he  has  paid  in  part  he  is  entitled  to  a  receipt  evidencing  such 
payment,  and  if  the  by-laws  so  provided,  or  if  the  corporation 
made  a  practice  of  issuing  certificates  for  partly  paid  stock 
with  the  amount  of  payments  indorsed  thereon,  he  would  have 
a  right  to  demand  such  a  certificate  as  soon  as  his  first  instal- 
ment was  paid.  In  the  absence  of  such  by-law  provision  or  of 
such  a  custom,  it  does  not  appear  that  a  stockholder  would  have 
any  legal  right  to  a  stock  certificate  until  he  had  paid  in  full  for 
the  stock  represented  thereby.  It  would  be  the  better  practice 
to  issue  no  certificates  of  stock  until  the  stock  represented  by 
them  was  full-paid. 

The  holder  of  a  certificate  of  stock  has  the  right  to  assign 
the  same,  or  to  surrender  it  and  have  it  split  up  or  issued  to 
himself  in  certificates  of  different  values.  The  assignee  has 
the  same  right  and  whenever  a  duly  assigned  certificate  is  sur- 
rendered to  the  company,  a  new  certificate  or  certificates  must 
be  issued  to  the  assignee  in  his  own  name  if  so  demanded. 
All  these  matters  should  be  clearly  set  forth  in  the  by-laws. 

By-law  specifications  as  to  the  signature  and  sealing  of 
certificates  are  useful  as  prescribing  in  detail  the  execution  of 
the  certificate  and  the  duties  of  the  different  officers  concerned. 
Such  by-law  regulations  must,  as  a  matter  of  course,  follow  any 
statute  provisions.  For  instance,  in  New  Jersey  the  treasurer 
must  join  with  the  president  in  signing  the  stock  certificates. 
In  most  states,  this  matter  is  discretionary  and  the  proper  offi- 


148  THE  BV-LAWS. 

cers  to  sign  stock  certificates  are  designated  solely  by  the  by- 
laws. No  matter  who  the  signing  officers  may  be,  the  sealing 
and  actual  issuing  of  the  certificate  is  usually  left  to  the  secre- 
tary. (See  §  44;  also  Forms  29,  30.) 

§  134.  Transfers  of  Stock. 

General  regulations  regarding  the  transfer  of  stock  as  well 
as  the  times  of  closing  the  stock  books,  are  in  many  states  a  mat- 
ter of  statutory  provision,  but  would  also  properly  appear  in 
the  by-laws  with  any  other  connected  matter.  The  whole  pro- 
cedure should  be  plainly  outlined  in  the  by-laws  as  a  guide  to 
the  officers  of  the  corporation,  and,  more  particularly,  for  the 
benefit  of  the  stockholders  who  are  thereby  informed  as  to  their 
exact  rights  in  the  matter. 

§  135.  Transfer  Agent  and  Registrar. 

In  the  larger  corporations,  or  in  any  corporation  where  the 
transfers  of  stock  are  numerous,  the  employment  of  special 
transfer  agents  and  registrars  is  usually  a  considerable  ad- 
vantage. By  this  means  the  officers  are  relieved  of  much  re- 
sponsibility, and  the  general  plan  offers  a  safety  and  a  con- 
venience in  the  issuance  of  stock  not  secured  under  any  other 
arrangement.  For  a  small  or  close  corporation  and  where 
transfers  are  few,  the  employment  of  such  agents  is  a  needless 
expense. 

Where  these  agents  are  to  be  employed,  the  by-laws  should 
give  the  appointing  power  to  either  the  board  of  directors  or 
one  of  the  standing  committees.  The  by-law  provision  cover- 
ing this  matter  should  also  require  the  signature  of  the  transfer 
agent  and  of  the  registrar  to  every  certificate  issued.  Where 
a  trust  company  is  to  be  appointed  as  transfer  agent  or  regis- 
trar and  the  appointment  is  of  probable  permanence,  such  ap- 
p.ointee  is  sometimes  named  in  the  same  by-law  provision.  As 
this  necessitates  an  amendment  of  the  by-laws  in  case  of  any 
change,  the  arrangement  is  of  doubtful  expediency. 


STOCK.  149 

The  duties  of  transfer  agent  and  registrar  are  distinct  but 
are  usually  performed  by  one  person  or  institution. 

§  136.  Stock  and  Transfer  Books. 

In  the  matter  of  stock  and  transfer  books,  the  statute  laws 
must  be  carefully  consulted.  New  Jersey  corporations  are  re- 
quired to  keep  their  stock  and  transfer  books  in  the  principal 
office  of  the  corporation  in  New  Jersey.  If  it  is  desirable  that 
duplicates  be  kept  elsewhere  the  by-laws  might  properly  so  pro- 
vide. Every  foreign  corporation  doing  business  in  New  York 
is  compelled  to  keep  a  stock  book  in  the  principal  office  of  the 
company  in  the  state.  Hence  the  by-laws  of  a  corporation 
organized  under  the  New  Jersey  laws  and  doing  business  in 
New  York  might  very  well  specify  in  this  particular  the  duties 
of  the  corporation  in  both  states. 

If  the  closing  of  the  transfer  books  before  the  date  of  the 
annual  meeting,  with  its  election  of  directors,  has  not  already 
been  provided  for  in  the  by-law  relating  to  the  transfer  of  stock, 
it  should  receive  attention  here.  Also  any  proviso  as  to  the 
closing  of  transfer  books  before  dividend  days  might  be  in- 
cluded under  this  head.  (See  Forms  34,  35.) 

§  137.  Preferred  Stock. 

The  preferred  stock  of  a  corporation  will  probably  have 
been  specifically  provided  for  in  the  charter.  It  is  customary, 
however,  to  repeat  such  provisions  in  the  by-laws  for  easy  ref- 
erence and  for  the  information  of  the  stockholders.  As  all  the 
details  relating  to  preferred  stock  are  usually  found  in  the  char- 
ter provisions  by  which  such  stock  is  created,  the  by-law  will 
be  merely  a  more  or  less  complete  repetition  of  the  charter 
specifications.  In  some  few  states  preferred  stock  is  authorized 
by  the  provisions  of  the  by-laws  which  in  such  event  become  of 
much  more  moment  and  should  be  drawn  with  the  same  care 
and  regard  for  the  necessities  of  the  case  as  would  any  charter 
provision.  The  by-law  authorizing  the  issue  of  preferred  stock 
could  not  be  materially  altered  or  amended  after  stock  had  been 


150  THE    BY-LAWS. 

sold  under  its  terms  except  with  the  consent  of  the  holders  of 
the  outstanding  preferred  stock.  If  it  were  modified  without 
such  consent,  the  changes  would  be  ineffective  as  regards  this 
outstanding  stock  unless  accepted  by  its  holders.  (See  Chap. 
VIII,  Preferred  Stock.) 

§  138.  Treasury  Stock. 

This  subject  is  brought  into  the  by-laws  merely  to  define 
the  term  and  the  status  of  the  stock  designated  thereby.  Such 
a  by-law  is  advisable  if  the  corporation  is  likely  to  have  any 
stock  of  the  kind.  The  term  "  treasury  stock  "  is  used  very 
loosely,  and,  without  some  defining  provision,  ambiguities  are 
apt  to  arise. 

The  status  of  this  treasury  stock  is,  where  not  expressly 
fixed  by  statute,  a  matter  of  common  law,  but  should  never- 
theless be  clearly  expressed  in  the  by-laws  as  a  matter  of  infor- 
mation for  both  officers  and  stockholders.  (See  Chap.  X, 
Treasury  Stock.) 

§  139.  Lost  Certificates. 

The  loss  of  stock  certificates  is  a  matter  of  not  uncommon 
occurrence  and  the  procedure  in  such  cases  should  be  clearly 
outlined  in  the  by-laws.  Stockholders  have  a  right  to  certifi- 
cates and,  if  their  certificates  are  lost,  to  have  them  replaced, 
but  the  corporation  on  its  part  has  the  right  to  require  any 
reasonable  safeguards  for  its  own  protection  before  the  re- 
issuance  of  such  certificates.  If  the  statutes  prescribe  the  pro- 
cedure to  be  followed,  the  by-law  provision  must  correspond. 
It  is  seldom  wise  to  reissue  lost  certificates  on  easier  terms  than 
those  laid  down  in  the  by-law  forms  given.  Only  the  absolute 
and  final  loss  of  a  certificate,  as  in  the  case  of  its  unquestioned 
destruction  by  fire,  would  justify  an  unprotected  reissue. 


CHAPTER  XXIV. 
STOCKHOLDERS. 


(See  Art.  II  in  Forms  8,  9  and  10.) 

§  140.  Annual  Meetings. 

An  annual  meeting  of  stockholders  at  which  directors  for 
the  ensuing  year  are  elected  is  usually  required  by  the  statutes. 
Where  not  so  required,  such  meeting  is  usually  provided  for 
in  the  by-laws.  It  is  the  most  important  function  of  the  stock- 
holders and  the  portion  of  the  by-laws  devoted  to  the  stock- 
holders is  principally  occupied  with  topics  pertaining  to  the 
annual  meeting. 

The  by-laws  providing  for  the  annual  meeting  should  fix 
the  time,  place,  and,  in  a  general  way,  the  proceedings  of  that 
meeting.  This  specification  of  the  business  to  be  transacted 
at  the  annual  meeting  does  not  in  any  way  limit  the  proceedings 
thereat  unless  expressly  so  stated  in  the  charter  or  by-laws. 
Such  enumeration  is  merely  to  prevent  important  action  being 
omitted  or  overlooked,  and  it  is  expected  that  in  addition  any 
other  business  or  matters  of  interest  to  the  stockholders  will 
be  considered  at  this  annual  meeting. 

§  141.  Special  Meetings. 

The  by-laws  must  provide  for  special  meetings  of  the  stock- 
holders, and  fix  the  preliminary  requirements  for  such  meet- 
ings. Frequently  the  president  is  given  authority  to  call 
special  meetings  at  his  discretion;  it  is  always  customary  to 
provide  for  such  meetings  to  be  held  pursuant  to  resolution  or 
other  specified  action  of  the  board ;  at  times  it  is  provided  that 

151 


152  THE   BY-LAWS. 

a  certain  number  of  the  directors  may  call  special  meetings  by 
a  written  request  or  call;  it  is  also  customary  and  proper  to 
allow  these  special  meetings  to  be  called  on  demand  of  a  certain 
proportion  in  interest — usually  one-third  or  a  majority  of  the 
outstanding  stock. 

It  is  usual  to  prescribe  in  the  by-laws  that  only  such  busi- 
ness as  is  specified  in  the  call  and  notice  shall  be  transacted  at 
a  special  meeting  of  stockholders.  This  is  a  matter  of  com- 
mon law,  and  in  some  states,  statutory  law,  and  is  included  in 
the  by-law  merely  to  emphasize  the  fact  that  any  business  to 
be  done  at  any  such  meeting  must  be  previously  notified  to  the 
stockholders.  The  call  and  notice,  to  be  sufficient,  must  give 
the  three  essential  facts — the  time,  place  and  purpose  of  the 
meeting.  If  any  one  of  these  is  omitted,  the  meeting  is  im- 
properly called  and  its  action  is  liable  to  be  held  illegal  and  of 
no  effect. 

§  142.  Officers  of  Meetings. 

It  is  customary  in  some  corporations  to  organize  each  stock- 
holders' meeting  with  officers  of  its  own  choosing,  who  may 
or  may  not  be  the  regular  officers  of  the  corporation.  Under 

r~some  conditions  this  plan  may  be  a  wise  one,  but,  generally,  it 
would  seem  better  to  provide  in  the  by-laws  that  the  officers 
of  the  corporation  shall  also  be  the  officers  of  the  stockholders' 

/^meeting.  In  such  case,  the  president,  or,  in  his  absence,  the 
other  officials  in  due  order,  would  preside,  while  the  secretary 
would  keep  the  records  of  the  meeting.  Such  an  arrangement 
saves  much  confusion  and  loss  of  time  on  occasion,  and  con- 
duces to  the  orderly  transaction  and  proper  record  of  the  busi- 
ness of  the  meeting. 

The  secretary  is,  under  this  arrangement,  properly  omitted 
from  the  officials  who  may  preside.  The  function  of  this  of- 
ficer is  to  record  the  proceedings  of  the  meeting  and  it  would 
not  be  advantageous  to  withdraw  him  from  his  proper  duties 
to  preside,  even  though  all  the  other  officers  were  absent. 


STOCKHOLDERS.  163 

§  143.  Notice  of  Meetings. 

Unless  there  is  some  material  reason  for  not  so  doing,  it 
will  be  found  advantageous  to  adopt  the  same  requirements  as 
to  notice  for  both  regular  and  special  meetings.  In  such  event, 
these  requirements  may  be  properly  included  in  the  one  by-law. 
Where  the  notices  for  the  two  kind  of  meetings  differ  mate- 
rially, the  details  for  each  meeting  should  occupy  a  separate 
by-law  section. 

The  notice  of  regular  meetings  should  specify  the  time, 
place,  and,  usually,  the  most  important  objects  of  the  meeting. 
As  stated  in  2  Cook  on  Corporations,  §595, 

"  where  unusual  business  is  to  be  transacted,  even  at 
a  regular  meeting,  the  notice  of  the  meeting  should 
state  that  unusual  business." 

The  notice  for  special  meetings  should  give  the  time  and 
place  of  meeting  and  specify  in  detail  all  the  business  to  be 
acted  upon  at  that  meeting. 

Where  a  corporation  has  but  few  stockholders,  the  provi- 
sions as  to  notice  of  meetings  will  sometimes  add,  that,  with  the 
presence  and  participation  or  with  the  consent  of  all  the  stock- 
holders, meetings  may  be  held  at  any  time  and  place  and  for  the 
transaction  of  any  business,  without  notice. 

Notice  of  meetings  is  best  given  through  the  regular  postal 
channels ;  telegraphic  notice  is,  in  the  larger  corporations,  usu- 
ally provided  for;  personal  notice  is  allowable,  but  should  al- 
ways be  served  in  writing.  A  verbal  notice  is  usually  difficult, 
and  sometimes  impossible,  of  proof. 

§  144.  Voting. 

The  usual  rule  in  regard  to  voting  is  that  each  stockholder 
of  a  corporation  is  entitled  to  one  vote  for  each  share  of  stock 
standing  in  his  name  on  the  books  of  the  corporation.  If 
there  are  any  variations,  such  as  cumulative  voting,  classified 
voting,  or  reservation  of  voting  to  one  class  of  stock,  such 
variation  should  be  stated  as  clearly  as  possible.  Perspicuity 


154  THE   BY-LAWS. 

and  precision  in  the  by-laws  relating  to  voting  may  save  much 
trouble  later.  Such  provisions  must,  as  a  matter  of  course, 
conform  to  any  state  statutes  on  the  subject. 

§  145.  Certified  List  of  Stockholders. 

Under  the  laws  of  New  Jersey  and  of  some  other  states, 
certified  lists  of  the  stockholders  entitled  to  vote  thereat  must 
be  provided  by  the  secretary  at  each  regular  meeting  of  the 
stockholders.  In  such  states  a  provision  to  this  effect  should  be 
incorporated  in  the  by-laws  either  as  a  separate  section,  or  as 
a  part  of  the  by-law  providing  for  annual  meetings  of  the  stock- 
holders. In  any  state  the  provision  is  a  satisfactory  one  and 
may  well  be  included  in  the  by-laws.  It  is  to  be  noted  that 
where,  as  is  usually  the  case,  the  statutes  provide  that  the  stock 
books  shall  be  the  final  authority  as  to  the  right  of  any  stock- 
holder to  vote,  the  certified  list  of  stockholders  cannot  be  made 
a  substitute  for  the  stock  book.  Usually,  however,  it  saves  ref- 
erence to  the  stock  book  and  is  much  more  convenient  than  this 
latter  record. 

§  146.  Election  of  Directors. 

As  the  election  of  directors  is  the  most  important  business 
of  the  annual  meeting,  directions  for  its  conduct  should  be 
very  explicit.  If,  as  is  the  case  in  certain  states,  the  statutes 
require  the  election  or  appointment  of  inspectors,  sworn  to 
the  proper  discharge  of  their  duties,  the  details  of  their  appoint- 
ment and  duties  should  be  fully  outlined.  If  inspectors  are 
not  prescribed  by  statute  and  are  not  desired,  some  other 
method  of  conducting  the  election  should  be  specified.  It  is 
usually  advisable  that  it  be  by  ballot,  though  this  is  not  essen- 
tial unless  prescribed  by  statute.  If  by  ballot,  provision  must 
be  made  for  the  appointment  of  tellers  or  some  substitute  there- 
for to  collect,  count  and  announce  the  vote. 

Unless  included  in  the  by-law  on  voting,  any  provisions  as 
to  cumulative  voting,  or  as  to  classification  of  the  stock  in 
regard  to  voting,  should  be  given  here.  Also,  if  the  directors 


STOCKHOLDERS.  155 

are  classified  so  that  but  one-third  or  one-fourth  are  elected 
each  year,  such  fact  should  be  stated  under  this  heading. 

The  term  for  which  the  directors  are  elected  should  also 
be  stated  clearly.  Usually  this  is  for  the  ensuing  year  and 
until  the  election  of  their  duly  qualified  successors.  The  di- 
rectors hold  until  the  election  of  their  successors  in  any  event, 
but  the  by-laws  should  state  the  fact. 

§  147.  Quorum. 

In  a  number  of  the  states,  the  proportionate  amount  of  the 
outstanding  stock  which  must  be  represented  at  a  meeting  to 
constitute  a  quorum  is  fixed  by  statute.  In  such  case  the  by- 
laws can  do  nothing  more  than  repeat  the  law  in  order  that  it 
may  be  remembered  and  observed.  If  the  statutes  do  not  so 
provide,  the  quorum  should  be  distinctly  prescribed  by  the  by- 
laws. If  not  provided  by  either  statute  or  by-law,  the  common 
law  rule  would  prevail  that  the  stockholders  present,  no  matter 
how  few  their  number,  constitute  a  quorum. 

In  the  absence  of  any  statutory  provisions,  the  by-laws  may 
provide  that  less  than  a  majority  of  the  outstanding  stock  shall 
constitute  a  quorum,  but  for  most  corporations  it  is  not  safe 
to  depart  from  the  usual  parliamentary  rule  that  a  majority  of 
the  stockholders  in  interest  are  necessary  for  a  quorum. 

To  illustrate  the  necessity  of  a  careful  consultation  of  the 
statutes  in  matters  of  corporate  procedure,  it  may  be  noted 
that  in  New  York  the  by-laws  may  prescribe  the  number  neces- 
sary to  constitute  a  quorum  for  ordinary  business,  but  cannot 
fix  a  quorum  for  the  election  of  directors,  those  present  at  any 
annual  meeting  being  a  sufficient  quorum  for  this  purpose  no 
matter  how  few  their  number  or  how  small  a  proportion  of  the 
outstanding  stock  they  represent. 

It  is  to  be  noted  that  the  common  law  rule  that  those  pres- 
ent constitute  a  quorum  and  may  elect,  applies  only  to  the  con- 
stituent membership  of  a  body,  such  as  the  stockholders  of  a 
corporation.  The  directors,  being  a  selected  body,  require  a 
majority  of  the  entire  board  to  constitute  a  legal  quorum. 


156  THE    BY-LAWS. 

(i  Morawetz,  2d  Ed.,  §  476;  2  Kent's  Com.,  §  293;  Matter  of 
Rapid  Transit  Ferry,  15  App.  Div.,  N.  Y.,  530,  1897.) 

§  148.  Proxies. 

Proxies  play  such  an  important  part  in  all  corporate  meet- 
ings that  the  by-law  provisions  affecting  them  should  be-  clear 
and  explicit.  At  common  law  the  right  does  not  exist.  It  is 
created  by  statute  in  many  states,  and  elsewhere  may  be  author- 
ized by  charter  provision,  or  in  most  states  by  by-law  enact- 
ment. Where  created  by  statute,  the  by-law  provision  must 
follow  the  statute. 

The  statutory  provisions  in  regard  to  proxies  vary  consid- 
erably in  the  different  states.  In  Maine  the  proxy  must  have 
been  executed  within  thirty  days  preceding  the  date  of  meet- 
ing; in  Massachusetts  the  limit  is  six  months;  in  New  York 
it  is  eleven  months ;  in  New  Jersey  three  years.  If  not  affected 
by  statutory  provisions,  a  proxy  would  run  until  revoked  or  ter- 
minated by  the  sale  of  the  stock  by  the  owner,  by  his  death  or 
by  the  death  of  the  proxy. 

§  149.  Order  of  Business. 

The  order  of  business  is  purely  formal  but  quite  essential 
to  the  proper  transaction  of  the  corporate  business.  It  may  be 
varied  to  meet  the  needs  of  any  particular  corporation.  The 
order  given  in  the  by-law  forms  indicates  the  usual  and  logical 
arrangement.  The  formal  order  of  business  may  be  suspended 
at  any  meeting,  in  whole  or  in  part,  by  a  majority  vote  of  those 
present,  or  by  their  mere  assent. 


CHAPTER  XXV. 
DIRECTORS. 


(See  Art.  Ill  in  Forms  8,  9  and  10.) 
§  150.  General  Considerations. 

Any  regulations  affecting  the  directors  and  any  restrictions 
upon  their  powers  and  actions  will,  for  the  most  part,  appear 
only  in  the  by-laws.  Specially  important  matters  sometimes 
appear  in  the  charter,  but  in  the  main  the  stockholders  must 
look  to  the  by-laws  to  direct  and  control  the  operations  of  the 
directors. 

Much  latitude  is  allowable  in  the  arrangement  of  the  by- 
laws affecting  directors.  In  the  larger  corporations  the  sub- 
divisions are  frequently  carried  further  than  here  indicated; 
in  the  smaller  corporations,  ordinarily,  not  so  far. 

Many  of  the  details  appearing  in  the  by-laws  affecting  di- 
rectors are  matters  of  law,  or  are  fixed  by  charter  provision 
and  are  brought  into  the  by-laws  merely  to  save  reference  to 
the  authorities  from  which  they  are  taken. 

§  151.  Number  and  Qualifications. 

In  many  states  the  number  of  directors  is,  within  certain 
limits,  fixed  by  statute.  In  other  states,  as  New  Jersey  and 
Massachusetts,  the  minimum  only  is  prescribed  by  statute  and 
any  number  in  excess  of  this  minimum  may  be  fixed  by  the 
by-laws.  In  most  states  the  minimum  number  of  directors 
allowed  is  three. 

For  a  small  or  close  corporation  a  limited  board  of  directors 
is  usually  advantageous.  Such  a  board  is  easily  assembled, 
keeps  in  touch  with  the  business,  and  is  generally  prompt  in 
consideration  and  action. 

157 


158  THE    BY-LAWS. 

In  the  larger  corporations  a  more  numerous  directory  is 
usual.  Frequently  this  is  a  matter  of  necessity  in  order  to 
provide  representation  for  the  different  stockholding  interests 
as  well  as  to  have  the  really  necessary  managing  representa- 
tives upon  the  board.  Though  necessary  the  arrangement  has 
many  disadvantages.  A  quorum  is  only  secured  with  diffi- 
culty, the  members  are  not  close  to  the  business  and  are  not  in- 
terested actively  in  its  management,  and  lengthy  explanations, 
much  discussion  and  prolonged  consideration  are  the  rule  when 
important  questions  are  really  taken  up.  As  a  result,  the  ac- 
tual management  of  the  business  and  of  the  corporate  affairs 
generally  is  delegated  to  the  standing  committees,  the  board 
only  meeting  to  listen  to  reports,  or  to  act  in  matters  of  excep- 
tional importance.  ( See  Chap.  XXVI,  Standing  Committees ; 
also  §  no.) 

The  ownership  of  stock  as  a  qualification  for  the  directory 
is  usually  regulated  by  statute.  In  some  states  such  qualify- 
ing stock  must  be  owned  when  the  director  is  elected.  In  most 
states,  if  the  director-elect  is  given  or  secures  stock  after  his 
election,  the  requirements  of  the  law  are  held  to  be  satisfied. 
If  the  statutes  merely  state  that  directors  must  be  stockholders 
the  ownership  of  one  share  of  stock  is  sufficient.  If  the  statutes 
are  silent  on  the  subject  of  stock  qualifications  of  directors,  or 
if  they  merely  require  that  directors  be  stockholders  the  by- 
laws may  legally  provide  that  some  reasonable  number  of 
shares  shall  be  the  qualification. 

In  some  states  it  is  provided  that  a  director  parting  with 
his  qualifying  stock  thereby,  ipso  facto,  ceases  to  be  a  director. 
In  order  to  prevent  any  discussion  or  misunderstanding  on 
this  point,  the  by-laws  should  repeat  the  statute  provision  where 
it  exists.  Elsewhere  it  would  be  prudent  to  state  explicitly 
either  that  the  parting  with  the  qualifying  stock  does  or  does 
not  terminate  the  director's  tenure  of  office.  As  a  general  rule 
it  would  seem  advisable  that  directors  should  be  stockholders 
of  the  corporation  to  some  material  extent,  and  that  if  they  part 
with  this  qualifying  stock  they  should  by  such  disposal  sever 
their  official  connection  with  the  board. 


DIRECTORS.  159 

If  there  is  any  statutory  requirement  as  to  citizenship  of 
directors  it  should  be  included  in  the  by-laws.  (See  §  105.) 

§  152.  General  Powers. 

At  common  law  the  directors  have  entire  charge  of  the 
f  property  and  affairs  of  the  corporation  with  full  power  and 
authority  to  manage  and  conduct  the  same.  The  statement 
of  the  by-laws  to  this  effect  is,  therefore,  nothing  more  than  a 
reiteration  of  the  conditions  as  they  exist,  brought  in  as  a 
matter  of  information.  If  the  powers  of  the  directors  are 
materially  modified  or  restricted  by  the  charter  or  by-laws,  the 
by-law  statement  should  correspond. 

§  I53-  Classification. 

The  usual  object  of  a  classification  of  directors  is  to  pro- 
vide against  any  radical  action  or  sudden  alteration  of  policy 
that  might  occur  if  the  whole  board  were  changed  at  one  time. 
In  perhaps  the  greater  number  of  states  it  must  be  secured 
through  by-law  provision. 

To  be  effective,  any  such  classification  of  directors  must 
be  permanent  and  therefore,  wherever  possible,  should  be  by 
charter  provision.  If  dependent  only  upon  the  provisions  of 
the  by-laws,  a  majority  of  the  stockholders  might  at  any  time 
assemble  with  due  formality,  repeal  the  by-laws  in  question  and 
thereby  abrogate  the  whole  arrangement.  (See  §  109.) 

If  classification  is  provided  by  charter  or  by-law  provision, 
and  at  any  time  the  necessity  arises  for  a  complete  change  of 
the  board,  as  in  event  of  a  sale  of  the  entire  stock,  or  of  a  gen- 
erally desired  change  of  management,  the  matter  can  be  ar- 
ranged by  the  resignation  of  the  entire  membership  of  the  old 
board  seriatim,  the  new  members  being  elected  to  fill  each  suc- 
cessive vacancy  as  it  is  brought  about  by  these  resignations. 

Classification  in  a  small  or  close  corporation  is  generally 
a  useless  and  somewhat  troublesome  formality. 


160  THE    BY-LAWS. 

§  154.  Vacancies. 

Unless  so  provided  by  statute,  charter,  or  by-laws,  the  board 
of  directors  has  no  power  to  fill  vacancies  caused  by  the  resig- 
nation or  death  of  its  members.  In  such  event  the  power  is 
reserved  to  the  stockholders  and  any  vacancies  in  the  board 
must  either  wait  until  the  next  annual  meeting  with  its  election 
of  directors,  or  be  filled  by  a  special  election,  the  stockholders 
being  called  together  for  the  purpose.  (In  re  Griffing  Iron 
Co.,  63  N.  J.  Eq.,  168,  357,  1899.) 

As  long  as  the  board  can  assemble  a  quorum  of  its  entire 
membership  it  may  continue  to  act  despite  vacancies,  but  it  is 
safer  to  keep  the  membership  up  to  the  prescribed  quota,  and 
it  is  almost  an  invariable  rule  to  give  the  board  the  power  to 
fill  vacancies  as  they  occur.  In  this  way  the  board  is  self- 
perpetuating  in  the  intervals  between  the  annual  meeting. 

The  by-laws  might  properly  provide  that  continued  ab- 
sence from  meetings  of  the  board  would,  of  itself,  vacate  the 
position  of  such  absentee  director.  In  any  such  case  the  by-law 
should  specify  the  exact  number  of  consecutive  absences  from 
regular  meetings,  or  from  regular  and  special  meetings,  neces- 
sary to  create  a  vacancy. 

By-laws  also  sometimes  provide  that  in  case  the  member- 
ship of  the  board  falls  below  the  required  quorum  at  any  time, 
so  that  the  board  is  unable  either  to  transact  business,  or  to 
fill  the  vacancies  in  the  body  so  as  to  enable  it  to  act,  a  special 
meeting  of  the  stockholders  shall  be  called  to  elect  such  num- 
ber of  directors  as  may  be  necessary  to  restore  the  board  to  its 
normal  membership. 

§  155.  Meetings. 

The  frequency  of  regular  meetings  of  the  board  is  to  be 
decided  by  the  particular  conditions.  Monthly  meetings  are 
usual,  but  in  close  corporations  with  a  small  board  it  is  often 
unnecessary  to  meet  regularly  more  than  once  in  each  quarter, 
or  even  once  each  year.  In  case  of  any  emergency  requiring 


DIRECTORS.  161 

action  of  such  small  board,  a  special  meeting  can  be  quickly 
and  easily  called. 

The  nature  and  formalities  of  the  call  necessary  to  summon 
a  special  meeting  of  the  board  are  purely  matters  for  the  cor- 
poration to  determine.  Usually  the  president  is  given  author- 
ity to  call  such  meetings  at  his  discretion.  Generally  it  is  pro- 
vided also  that  such  meeting  shall  be  called  upon  written  re- 
quest of  a  certain  number — usually  two-thirds — of  the  di- 
rectors. More  rarely  it  is  prc  ,  ided  that  a  special  meeting  shall 
be  called  upon  the  written  request  of  a  certain  proportion  in  in- 
terest of  the  stockholders. 

Where  the  board  is  small  it  is  customary  and  advisable  to 
provide  that  meetings  may  be  held  at  any  time  and  place  and 
without  previous  notice  by  the  unanimous  consent,  or  unani- 
mous participation  of  the  board  membership.  Such  a  provi- 
sion would  usually  be  useless  if  the  board  were  large. 

The  place  of  meeting  should  be  fixed  by  the  by-laws  though 
a  proviso  may  be  added  that  special  meetings  may  be  held  else- 
where by  unanimous  consent  of  the  board.  The  office  of  the 
corporation  is  the  proper  place  for  directors'  meetings  and  they 
should  be  held  there  unless  otherwise  agreed  by  all  the  direct- 
ors. To  allow  a  majority  of  the  board  to  call  meetings  in 
private  offices,  or  in  places  difficult  of  access,  or  to  permit  of 
adjournment  to  such  places,  except  by  unanimous  agreement, 
is  to  invite  the  gravest  abuses. 

§  156.  Notice  of  Meetings. 

It  is  supposed  that  members  of  the  board  are  familiar  with 
the  date  of  regular  meetings.  Hence,  there  is  not  the  same 
legal  necessity  for  notice  that  exists  in  the  case  of  special 
meetings.  It  is  usual  though  to  provide  that  notice  of  regular 
meetings  shall  be  given  by  the  secretary  as  a  matter  of  con- 
venience and  to  prevent  such  meeting  from  being  overlooked. 
In  the  more  comprehensive  sets  of  by-laws  it  is  customary  to 
add  a  proviso  that  failure  to  give  such  notice  shall  not  affect 
the  validity  of  the  meeting  or  of  any  proceedings  thereof.  (See 


162  THE    BY-LAWS 

Form  10.)  It  is  not  probable  that  proceedings  in  a  regular 
meeting  of  directors  would  in  any  case  be  invalidated  on  ac- 
count of  failure  to  give  notice,  but  the  proviso  is  added  out  of 
abundant  caution. 

Special  meetings  unless  adequate  notice  thereof  has  been 
given,  are  not  legally  called  and  their  action  may  be  set  aside. 
Requirements  as  to  notice  may,  however,  be  waived  and  special 
meetings  be  held  without  notice  by  unanimous  consent,  or  with 
the  participation  of  all  the  directors.  Business  of  any  kind 
may  be  transacted  at  any  meeting  if  all  the  directors  have  given 
written  consent  thereto  or  are  participating  in  the  proceedings. 

Notices  of  special  meetings  of  directors  are  usually  sent 
by  either  mail  or  telegraph  such  reasonable  time  before  the 
meeting  as  will,  under  ordinary  conditions,  permit  the  attend- 
ance of  all  the  members  of  the  board.  The  by-laws  should 
prescribe  the  condition  of  such  notice.  The  by-laws  also  usu- 
ally reiterate  the  common  law  rule  that  no  business  except  that 
specifically  notified  in  the  call  and  notice  shall  be  considered 
or  acted  upon  at  special  meetings. 


§  *57'  Quorum. 

If  the  statutes  are  silent  as  to  the  number  of  directors  requi- 
site for  a  quorum,  the  charter  or  by-laws  will  control.  If  both 
the  statutes  and  the  charter  and  by-laws  are  silent,  the  common 
law  controls  and  a  majority  of  the  full  membership  of  the 
board  is  then  requisite  for  a  quorum. 

If  the  matter  is  regulated  by  the  by-laws  any  desired  num- 
ber may  be  designated  a  quorum  even  though  this  number  may 
be  much  less  than  a  majority  of  the  board.  It  is  customary 
and  advisable,  however,  to  require  a  majority  of  the  entire 
board  to  constitute  a  quorum.  Under  such  provision,  any  re- 
duction in  the  membership  of  the  board  by  death,  removal  or 
resignation,  would  not  affect  the  number  requisite  to  a  quo- 
rum, which  still  remains  the  same.  The  by-law  should  be 
carefully  worded  to  avoid  any  misunderstanding  on  this  or 
other  points.  As  a  matter  of  general  law  the  statement 


DIRECTORS.  168 

might  be  included  in  this  by-law  that  directors  must  appear 
in  person  and  cannot  be  represented  by  proxies. 

§  158.  Election  of  Officers. 

The  by-laws  should  designate  the  officials  of  the  corpora- 
tion, the  time  of  their  election  and  the  period  for  which  they 
are  elected.  It  is  also  usual  to  provide  that  they  shall  hold 
office  until  the  election  and  qualification  of  their  successors, 
unless  sooner  removed  by  action  of  the  board.  It  is  also  usu- 
ally specified  that  election  shall  be  by  ballot,  and  that  the  board 
shall  fix  the  compensation  of  officers  and  fill  any  vacancies  that 
may  occur  on  the  official  staff. 

In  arranging  the  respective  dates  of  the  stockholders'  an- 
nual meeting  at  which  the  directors  are  elected,  and  the  meet- 
ing of  the  directors  thereafter  at  which  the  officers  are  usually 
elected,  the  latter  meeting  should  not  succeed  the  former  so 
closely  as  to  give  inadequate  time  for  the  notification  of  newly 
elected  directors.  Frequently  such  directors'  meeting  will  be 
arranged  to  follow  the  stockholders'  meeting  on  the  same  day, 
but  a  few  hours  elapsing  between  the  two  meetings.  If  the 
board  be  small  and  any  possible  new  members  readily  access- 
ible, or  if  the  entire  membership  be  re-elected  the  juxtaposi- 
tion of  the  two  meetings  is  immaterial.  Where,  however, 
these  conditions  do  not  exist,  it  may  occur  that  some  newly 
elected  member  of  the  board  fails  to  receive  notice  of  his  elec- 
tion, and  of  the  subsequent  directors'  meeting,  in  time  to  permit 
of  his  attendance.  This  might  prevent  the  election  of  officers 
or  invalidate  it  if  held.  For  this  reason  the  board  meeting  for 
the  election  of  officers  should,  as  a  rule,  be  fixed  at  such  date 
subsequent  to  the  annual  meeting  as  will  give  full  time  for  the 
regular  by-law  notice  of  the  board  meeting. 

It  is  customary  and  entirely  proper  to  fix  the  date  of  the 
election  of  officers  within  a  reasonable  time  after  the  elec- 
tion of  the  board  in  order  that  this  new  board  may  without 
delay  elect  its  own  corps  of  officers. 


164 


THE    BY-LAWS. 


§  159.  Removal  of  Officers. 

If  an  officer  is  elected  for  a  specified  term  he  cannot 
usually  be  legally  removed  except  for  sufficient  cause,  and 
not  then  until  he  has  had  opportunity  to  appear  in  his  own 
behalf.  In  a  few  states  the  power  to  remove  officers  at 
pleasure  is  given  the  directors  by  statute.  Otherwise,  if  it 
is  desired  that  the  board  shall  have  this  power  of  removal, 
it  should  be  clearly  conferred  on  them  by  the  by-laws.  The 
by-law  giving  the  power  should  be  explicit  and  to  be  effec- 
tive should  provide  for  removal  at  pleasure  with  or  without 
cause.  If  such  power  of  removal  is  given  the  directors  by 
the  by-laws,  each  officer  accepts  his  office  subject  to  this 
regulation,  knows  upon  what  tenure  he  holds  and  may 
thereafter  be  removed  at  the  pleasure  of  the  board  by  a 
mere  majority  resolution.  (See  §  177.)  (See  Douglass  vs. 
Merchants  Ins.  Co.,  118  N.  Y.,  484,  1890;  in  re  Griffing 
Iron  Co.,  63  N.  J.  Eq.,  168,  357,  1899.) 

§  1 60.  Compensation  of  Directors. 

Directors  cannot  claim  any  salary  or  compensation  for 
their  services  as  directors  other  than  is  expressly  set  forth 
in  the  by-laws.  Definite  salaries  might  be  fixed,  but  com- 
pensation is  usually  provided  in  the  form  of  a  certain  stipend 
for  attendance  upon  meetings,  which  is  not  earned  unless 
the  director  is  present  at  the  entire  meeting  from  roll  call 
to  adjournment.  The  amounts  paid  for  attendance  at  meet- 
ings vary,  rarely  falling  below  $5  or  exceeding  $25.  Some- 
times a  certain  fixed  sum  is  appropriated  for  each  meeting 
and  is  divided  among  the  directors  present.  The  whole 
matter  is  one  that  rests  entirely  in  the  discretion  of  the 
stockholders  and  would  naturally  vary  in  different  corpora- 
tions. (See  §  176.) 

§  161.  Power  to  Pass  By-Laws. 

In  many  of  the  states  the  directors  are,  by  statute,  given 
extensive  powers  over  the  by-laws.  Elsewhere  it  is  a  matter 


DIRECTORS.  165 

for  charter  or  by-law  regulation.  It  is  doubtful  whether  it 
is  wise  in  any  case  to  allow  the  directors  full  power — as  may 
be  done  by  charter  provision  in  New  Jersey — to  over-ride 
by-laws  passed  by  the  stockholders.  The  only  direct  con- 
trol of  the  stockholders  over  the  affairs  of  the  corporation 
is  exercised  through  the  by-laws,  and  if  the  directors  can 
repeal  and  abrogate  these  by-laws  at  will  the  board  is  prac- 
tically unrestrained  in  its  management  of  the  corporate 
affairs. 

At  times  it  is  undoubtedly  advantageous  that  the  board 
should  have  some  power  over  the  by-laws  in  order  to  pro- 
vide for  matters  or  emergencies  not  foreseen  by  the  stock- 
holders. All  necessary  power  in  this  direction  is,  however, 
given  when  the  board  is  allowed  to  pass  by-laws  in  harmony, 
or  not  inconsistent  with  those  passed  by  the  stockholders. 
Anything  further  is  dangerous  and  susceptible  of  abuse. 
(See  §§  73  and  108.) 

§  162.  Order  of  Business. 

The  order  of  business  is  a  purely  formal  regulation. 
A  convenient  arrangement  is  given  in  the  sets  of  by-laws 
in  Part  VII.  The  order  of  business,  although  incorporated 
in  the  by-laws,  is  not  mandatory,  and  any  item  may  be 
passed  or  the  entire  regular  order  of  business  may  be  sus- 
pended or  varied  at  the  pleasure  of  the  board. 


CHAPTER  XXVI. 
STANDING    COMMITTEES. 


(See  Art.  IV  in  Form  10.) 
§  163.  Purpose. 

In  most  of  the  larger  corporations  the  board  of  directors 
is  composed  of  many  members.  Usually  these  are  busy 
men,  possibly  living  in  different  parts  of  the  country  and 
almost  always  difficult  to  assemble.  Many  of  them  are  on 
the  board  not  because  of  peculiar  qualifications  or  ability 
in  the  conduct  of  the  particular  corporation  business,  but 
solely  as  representatives  of  special  interests.  Under  such 
circumstances  the  board  is  not  an  efficient  instrument  for 
the  direction  of  the  corporate  affairs  and  something  better 
adapted  to  the  purpose  is  necessary.  The  standing  com- 
mittee is  then  usually  employed. 

Standing  committees  are  permanent  committees  of  the 
board  of  directors  as  opposed  to  committees  of  the  board 
appointed  for  temporary  purposes.  They  frequently  exer- 
cise all  the  powers  of  the  board.  They  are  a  natural  out- 
growth of  the  extension  of  the  corporate  system  to  the 
larger  enterprises  in  which  unwieldy  boards  are  commonly 
found.  The  slow,  cumbrous  and  uncertain  action  of  these 
large  boards  is  replaced  by  the  prompt,  positive  and  effi- 
cient action  of  a  small,  selected  committee. 

The  membership  of  the  standing  committees  is  seldom 
less  than  three  or  more  than  five.  To  increase  the  member- 
ship of  standing  committees  too  greatly  would  involve  the 
very  ills  that  they  were  created  to  avoid.  As  many  stand- 
ing committees  may  be  appointed  as  the  conditions  demand. 

166 


STANDING    COMMITTEES.  167 

In  many  cases  the  executive  committee  alone  is  found  suf- 
ficient. In  others  a  finance  committee  is  added.  It  is  but 
seldom  that  more  are  necessary.  These  committees  prac- 
tically take  the  place  of  the  board  in  the  direct  management 
of  the  corporate  affairs. 

If  the  executive  committee  is  the  only  standing  com- 
mittee, it  is  usually  given  all  the  powers  of  the  board,  and 
becomes  the  active  agent  by  whom  these  powers  are  exer- 
cised. If  there  is  a  finance  committee,  such  matters  as  come 
within  its  purvey  will  be  reserved  from  the  powers  of  the 
executive  committee,  and  the  two  committees  will  then 
between  them  exercise  all  the  powers  of  the  board.  In 
such  case  the  executive  committee  will  control  in  all  general 
matters,  while  the  powers  of  the  finance  committee  will  be 
confined  to  the  management  and  supervision  of  the  cor- 
porate finances. 

These  standing  committees,  appointed  with  such  powers, 
are  the  real  managing  bodies  of  the  corporation,  the  board 
merely  supervising  their  operations.  They  will  usually  act 
and  then  report  their  action  to  the  board.  In  some  cases 
where  they  prefer  to  throw  responsibility  upon  the  board, 
or  where  some  statute  provision  requires  action  of  the 
board,  or  when  it  is  desirable  to  lend  added  weight  to  a 
contemplated  measure,  they  will  report  the  matter  to  the 
board  with  a  recommendation  that  the  desired  action  be 
taken. 

It  is  to  be  noted  that  at  times  an  executive  committee 
is  provided  when  the  board  itself  is  sufficiently  small  to 
permit  of  prompt  action  and  proper  attention  to  the  cor- 
porate business.  In  such  case  the  committee  may  become 
directly  injurious  to  the  real  corporate  interests,  the  few 
members  composing  it  managing  the  entire  business  of 
the  corporation  to  the  practical  and  improper  exclusion  of 
the  board.  In  such  cases  the  directors,  as  a  body,  usually 
lose  interest,  board  meetings  are  neglected  and  the  execu- 
tive committee  controls  without  supervision. 


168 


THE    BY-LAWS. 


The  only  danger  to  be  apprehended  from  the  employ- 
ment of  the  standing  committee  is  found  in  the  fact  that 
it  is  at  times  used  as  a  convenient  means  for  the  elimination 
of  the  board,  or  certain  elements  of  the  board,  from  con- 
trol of  the  corporate  affairs,  the  real  management  of  the 
corporation  being  placed  in  the  hands  of  the  selected  few 
who  constitute  the  committees.  This  danger  can  only  be 
avoided  by  careful  definition  and  judicious  regulation  of  the 
powers  of  these  committees  in  the  charter  or  by-law  pro- 
visions by  which  they  are  created.  (See  2  Cook  on  Cor- 
porations, §  715.) 

§  164.  Appointment. 

The  standing  committees  are  usually  created  and  em- 
powered and  the  manner  of  their  appointment  or  election 
is  prescribed  by  charter  or  by-law  provisions.  Since  the 
powers  of  the  board  are  to  a  greater  or  less  degree  to  be 
delegated  to  these  committees  they  must  be  composed  of 
members  of  the  board.  The  provisions  as  to  their  appoint- 
ment are  therefore  confined  to  the  manner  of  their  selection 
from  this  body.  Sometimes  the  creating  provision  will 
provide  that  certain  officials  of  the  board  shall  constitute 
the  standing  committees,  as  for  instance  that  the  president, 
vice-president  and  treasurer  shall  constitute  the  executive 
committee.  Generally  the  treasurer  is  designated  as  a  mem- 
ber of  the  finance  committee.  Also  it  is  quite  usual  to  pro- 
vide that  the  president  of  the  company  shall  ex  officio  be  a 
member  of  the  executive  committee  and  sometimes  it  is  pro- 
vided that  he  shall  be  a  member  and  the  presiding  officer  of 
all  standing  committees.  At  times  it  is  provided  that  the 
president  shall  appoint  the  different  standing  committees. 
The  most  common,  and  perhaps  the  safest  plan,  leaves  the 
membership  of  these  committees  to  be  decided  by  an  elec- 
tion in  the  board. 

If  there  is  any  danger  of  the  committees  being  used  as 
a  device  to  exclude  minority  interests  from  management 


STANDING    COMMITTEES.  169 

of  the  corporate  affairs,  such  majority  of  the  board  may  be 
prescribed  for  the  election  of  their  members  as  to  require 
the  aid  of  the  minority  for  their  formation.  A  provision  of 
this  kind  might  result  in  a  dead-lock,  but  in  that  case  the 
board  would  continue  in  the  direct  management  of  the  cor- 
porate interests  until  some  agreement  was  reached  and 
acceptable  standing  committees  elected. 

There  is  no  general  rule  as  to  the  appointment  or  se- 
lection of  officers  for  the  standing  committees.  In  some 
cases  they  are  designated  by  the  creating  provisions,  in 
others  they  are  elected  by  the  board,  while  in  many  cases 
the  selection  of  officers  is  left  to  be  decided  by  each  com- 
mittee for  itself.  It  is  probably  simplest  and  most  satis- 
factory to  provide  that  the  chairman  of  each  committee 
shall  be  designated  by  the  board.  The  only  other  necessary 
officer  is  the  secretary.  At  times  it  is  provided  that  the 
secretary  of  the  corporation  shall  also  act  as  secretary  of 
the  committees.  If,  however,  there  is  more  than  one  stand- 
ing committee,  and  especially  if  these  committees  are  active, 
it  may  be  found  advantageous  for  each  committee  to  have 
a  distinct  recording  official  who  may  or  may  not  be  a  mem- 
ber of  that  committee. 

§  165.  Composition. 

The  membership  of  the  standing  committees  must  be 
confined  to  the  membership  of  the  board,  otherwise  the 
power  of  the  board  to  delegate  its  authority  to  the  com- 
mittees would  be  more  than  questionable  and  the  action  of 
such  committees  of  doubtful  legality. 

Within  this  limitation,  the  standing  committees  should 
be  formed  on  the  principles  of  specialization.  Those  most 
familiar  with  the  corporate  business  and  most  capable  in 
its  practical  management  will  naturally  be  grouped  in  the 
executive  committee.  Those  of  most  skill  and  standing  in 
financial  matters  will  properly  be  selected  for  the  member- 
ship of  the  finance  committee.  Other  considerations  fre- 


170  THE   BY-LAWS. 

quently  intervene  to  prevent  this  ideal  formation  of  the 
standing  committees  but  the  more  nearly  it  is  approximated 
the  better  will  be  the  practical  results. 

The  creating  provisions  not  uncommonly  provide  that 
the  president,  vice-president  and  treasurer,  with  or  without 
additional  members,  as  may  be  desired,  shall  constitute  the 
executive  committee.  These  officers  being  elected  by  the 
board  to  the  positions  they  already  occupy,  are  presumedly 
men  of  executive  ability,  familiar  with  the  corporate  affairs 
and  therefore  peculiarly  qualified  to  act  as  members  of 
the  managing  committee.  On  the  other  hand  such  appoint- 
ment adds  materially  to  the  responsibility,  the  power  and 
the  importance  of  these  official  positions  and  may  for  that 
reason  at  times  be  unadvisable. 

The  treasurer  should  obviously  be  a  member  of  the 
finance  committee  unless  special  reasons  to  the  contrary 
exist.  If  a  member  of  the  finance  committee  he  should 
not  ordinarily  also  act  on  the  executive  committee. 

§  1 66.  Powers. 

There  is  no  doubt  that  the  board  may  legally  delegate 
its  authority  to  properly  constituted  standing  committees. 
(The  Sheridan  El.  L.  Co.  vs.  The  Chatham  Nat.  Bank,  127 
N.  Y.,  517,  1891;  Olcott  vs.  Tioga  Railroad  Co.,  27  N.  Y., 
546,  1863).  This  delegated  authority  may  be  co-extensive 
with  the  powers  of  the  board  in  the  interim  between  board 
meetings,  or  may  be  limited  to  certain  specified  actions  or 
lines  of  action.  The  extent  of  the  power  to  be  delegated 
to  the  standing  committees  is  usually  fixed  by  the  charter 
or  by-law  provisions  by  which  the  committees  are  created, 
though  it  may  be  left  to  be  determined  by  the  board  itself. 
If  the  powers  of  the  standing  committees  are  fixed  by  the 
creating  provisions  the  board  can  not  delegate  powers ,  in 
excess  of  those  prescribed. 

The  creating  provisions  frequently  go  into  detail  as  to 
the  powers  and  duties  of  such  committees.  These  powers 


STANDING    COMMITTEES.  171 

should  not  be  too  extended  and  the  committees  should  be 
required  to  keep  full  and  adequate  written  records  of  their 
proceedings.  These  records  should  be  open  to  inspection 
by  members  of  the  board,  and  frequent  reports  to  the  board 
should  be  required. 

Properly  constituted  and  empowered,  and  within  the 
limits  of  their  authority,  the  standing  committees  act  with 
the  same  binding  force  and  effect  as  would  the  board  itself. 
Their  contracts  are  not  affected  by  any  subsequent  disap- 
proval of  the  board  nor  can  the  corporation  refuse  to  carry 
out  any  of  their  proper  undertakings. 

§  167.  Procedure. 

The  standing  committees  act  as  do  other  parliamentary 
bodies.  Their  usual  officers  are  a  chairman  and  secretary, 
and  these  officers  perform  the  usual  duties.  Regular  meet- 
ings may  be  provided  for  by  the  by-laws  with  full  provision 
as  to  their  conduct  and  record,  or  the  matter  may  be  left 
to  be  regulated  by  the  committees  as  seems  to  them  best. 
Owing  to  their  compactness  and  the  manner  in  which  they 
are  usually  constituted,  the  standing  committees  are  easily 
assembled  and  a  large  portion  of  the  business  of  such  com- 
mittees is  usually  accomplished  in  special  meetings,  either 
regularly  called  or  assembled  by  unanimous  consent. 

All  special  meetings  should  be  duly  notified  to  the  mem- 
bers, and  the  consent  or  participation  of  every  member 
must  be  secured  to  consent  meetings ;  decisions  reached  and 
action  taken  should  be  expressed  in  duly  adopted  resolu- 
tions and  minutes  should  be  kept  containing  a  faithful 
record  of  all  committee  proceedings.  These  proceedings 
should  from  time  to  time  be  reported  to  the  board,  either 
by  direct  report,  or  by  the  reading  of  the  committee  min- 
utes. Vacancies  in  the  committees  should  be  filled  in  ac- 
cordance with  by-law  provisions,  usually  either  by  the  com- 
mittee itself,  or  by  action  of  the  board,  except  in  the  case  of 
an  ex-officio  member,  who  succeeds  to  his  position  on  the 


172  THE   BY-LAWS. 

committee  by  virtue  of  his  election  to  official  position  in  the 
corporation. 

A  majority  of  the  executive  committee,  unless  other- 
wise expressly  provided,  constitutes  a  quorum  and  a  major- 
ity of  that  quorum  has  power  to  act.  It  may  be  prudent  to 
provide  that  the  affirmative  vote  of  a  majority  of  the  whole 
committee  shall  be  necessary  for  action.  This  does  not 
necessitate  any  increase  in  the  number  necessary  to  a 
quorum,  but  if  a  mere  common-law  quorum  be  present 
requires  the  affirmative  vote  of  all  the  members  present 
to  secure  action. 


CHAPTER   XXVII. 
OFFICERS. 


(See  Art.  IV  in  Forms  8  and  9;  also  Art.  V  in  Form  10.) 

§  1 68.  Enumeration;  Qualifications. 

The  term  officers  is  here  applied  to  those  agents  of  the 
corporation  appointed  or  elected — usually  by  the  board  of 
directors — as  the  direct  executive  representatives  of  the 
board  and  of  the  corporation.  The  directors  are  themselves 
at  times  styled  officers,  and  with  legal  correctness,  but  to 
avoid  confusion  the  term  is  not  so  used  in  the  present 
volume. 

The  details  relating  to  the  officials  of  a  corporation  are 
matters  of  by-law  prescription.  The  statutes  are  usually 
silent  in  the  matter,  the  charter  seldom  takes  cognizance 
of  anything  pertaining  to  the  corporate  officials,  and  the 
by-laws  control. 

Under  these  circumstances  the  stockholders  as  the  by-  ; 
law  making  power  have  wide  discretion.  They  fix  the 
number,  titles,  qualifications,  duties,  method  of  election  and 
all  other  details  relating  to  the  officers,  and  their  wishes  as 
expressed  in  the  by-laws,  prevail.  If  not  covered  in  the  by- 
laws such  matters  are  regulated  by  common  or  parlia- 
mentary law  or  custom. 

The  necessary  officers  of  a  corporation  are  the  president, 
secretary  and  treasurer.  In  the  smaller  corporations  two 
of  these  offices  are  sometimes  held  by  one  person.  In  most 
cases,  however,  the  number  of  officers  is  increased  by  the 
addition  of  one  or  more  vice-presidents,  a  managing  director 

173 


174  THE    BY-LAWS. 

or  general  manager,  and  at  times  a  chairman  of  the  board, 
counsel  and  an  auditor.  The  officials  named  are,  for  the 
most  part  elective,  and,  with  the  occasional  exception  of  the 
general  manager,  are  supposed  to  report  directly  to  the 
board  or  to  one  of  the  standing  committees.  Outside  of 
committee  officials,  other  agents  and  employees  are  not 
usually  designated  officers  and  but  seldom  come  in  contact 
with  the  board. 

The  election  of  officers  naturally  follows  closely  on  the 
election  of  directors  and  is  usually  held  as  soon  thereafter 
as  the  newly  elected  board  can  be  properly  assembled. 

The  president  and  vice-president  are  chosen  from  the 
board  itself  as  they  may  be  called  upon  to  preside  at  its  meet- 
ings. This  is  not  necessary  in  regard  to  the  other  officers, 
though  the  treasurer  is  frequently  chosen  from  the  member- 
ship of  the  board,  and  other  officials  are  so  selected  when  con- 
venient. The  treasurer  of  the  larger  corporations  is  usually 
selected  on  the  basis  of  his  financial  standing  or  ability.  It 
would  seem  obvious  that  the  corporate  officials  should  all 
have  special  qualifications  and  a  knowledge  of  the  duties 
of  their  positions,  though  other  considerations  frequently 
prevail. 

§  169.  Presiding  Officers. 

The  president  is  the  usual  presiding  officer.  His  duties 
vary  widely  according  to  the  size  and  character  of  the  cor- 
poration. In  the  smaller  corporations  he  is  frequently 
assigned  the  active  management  of  the  business  in  addition 
to  the  duties  more  strictly  pertaining  to  his  office.  In  the 
larger  corporations  the  duties  incident  to  the  president's 
office  are  frequently  allotted  in  greater  or  less  degree  to 
other  officers.  If  a  chairman  of  the  board  exists,  that  official 
presides  at  all  meetings  of  the  board.  If  there  is  a  chair- 
man of  the  finance  committee,  he  takes  over  the  super- 
vision and  direction  of  the  financial  matters  usually  assigned 
to  the  president.  At  times  certain  of  the  duties  ordinarily 


OFFICERS.  175 

pertaining  to  the  president  are  performed  by  the  vice-pres- 
idents. 

The  utility  of  a  chairman  of  the  board  is,  in  most  cases, 
doubtful.  Where  the  office  exists,  its  duties  should  be 
clearly  defined  by  the  by-laws.  If  a  chairman  of  the  board 
be  provided,  the  general  rule  that  the  president  must  be  a 
member  of  the  board  is  not  so  imperative,  though  even 
then  as  the  chief  executive  of  the  company  he  should  be 
present  at  board  meetings,  must  almost  of  necessity  par- 
ticipate in  its  discussions  and  deliberations  and  should  there- 
fore be  a  member  of  the  body. 

Vice-presidents,  designated  and  ranked  as  first,  second, 
third  and  so  on,  may  be  provided  for  in  accordance  with 
the  corporate  needs.  These  perform  the  duties  of,  the  pres- 
ident in  the  absence  of  that  official,  or  of  the  ranking  official, 
in  the  order  of  precedence.  In  addition,  in  the  larger  cor- 
porations, active  functions  are  usually  provided  for  several 
vice-presidents.  Frequently  their  number  is  swelled  merely 
to  afford  honorary  positions  for  members  of  the  board. 
In  the  smaller  corporations,  the  duties  of  the  vice-president 
are  sometimes  assigned  to  the  treasurer,  or  this  latter  is 
elected  as  vice-president  and  treasurer.  (See  §  142.) 

The  presiding  officers  of  the  standing  committees  are 
usually  provided  for  either  by  the  by-laws  or  by  action  of  the 
board,  but  are  sometimes  left  for  the  committees  to  elect. 
The  president  of  the  company  is  usually  president  of  the 
executive  committee;  the  treasurer  is  frequently  placed  at 
the  head  of  the  finance  committee. 


§  170.  Secretary. 

The  duties  of  the  secretary  should  be  fully  and  explicitly 
prescribed  in  the  by-laws,  especially  as  to  signatures.  He 
would  naturally  have  charge  of  the  corporate  seal  and  affix 
and  attest  it  when  necessary,  though  the  president  is  occa- 
sionally authorized  thereto  as  well.  Unless  the  statutes,  as 


176  THE    BY-LAWS. 

in  New  Jersey,  call  for  the  signatures  of  the  president  and 
treasurer  to  stock  certificates,  the  secretary  is  often  desig- 
nated to  sign  such  certificates  with  the  president.  He  gen- 
erally has  entire  charge  of  the  details  of  the  issue  and 
recording  of  stock.  The  corporate  records  are  entrusted 
to  him,  and  the  various  state  reports  are  usually  prepared 
by  him.  His  powers  and  duties  as  to  signing  contracts  are 
entirely  dependent  upon  the  by-laws  or  conditions  of  the 
particular  corporation.  Usually  he  signs  with  the  president, 
but  frequently  the  president  signs  alone,  or  with  the  treas- 
urer, or  the  matter  is  decided  in  each  important  instance 
by  resolution  of  the  board.  When  his  signature  is  not 
affixed  to  sealed  contracts,  it  should  appear  on  such  instru- 
ment in  attestation  of  the  seal. 


§  171.  Treasurer. 

The  treasurer  is  usually  given  full  charge  of  the  cor- 
porate finances  and  all  that  immediately  relates  thereto; 
also  the  custody  of  all  corporate  instruments  and  evidences 
of  value.  He  signs  all  checks,  with  or  without  the  president 
as  the  by-laws  or  directors  may  prescribe,  and  participates 
in  the  execution  of  all  the  instruments  pertaining  to  the 
financial  transactions  of  the  corporation.  The  by-laws 
should  clearly  define  the  extent  of  the  treasurer's  powers 
and  responsibilities. 

Whenever  the  treasurer's  position  involves  the  handling 
or  possession  of  large  sums  of  money,  or  of  considerable 
property  values,  he  should  be  required  to  give  bond.  In  a 
small  corporation,  or  one  where  the  responsibilities  of  the 
treasurer  are  light,  such  requirement  is  an  unnecessary 
formality. 

The  finance  committee,  if  such  a  committee  exists,  takes  on 
itself  many  of  the  duties  and  responsibilities  of  the  treasurer, 
and,  unless  that  official  is  chairman  of  the  finance  committee, 
renders  his  position  much  less  onerous. 


OFFICERS.  177 

§  172.  Managing  Officers. 

The  position  of  managing  director  is  only  found  in  the 
larger  corporations,  and  the  position  and  duties  of  this  official 
are  often  somewhat  indeterminate.  In  some  cases  his  duties 
are  practically  those  of  the  general  manager;  in  others  he  is 
given  much  of  the  power  and  many  of  the  duties  of  the  presi- 
dent. At  times,  the  position  is  in  the  nature  of  a  compromise, 
the  duties  of  the  managing  director  being  carved  out  from 
those  of  the  president  and  general  manager. 

The  position  of  managing  director  is  supposed  to  be  more 
dignified  than  that  of  the  general  manager.  Its  duties  should 
be  clearly  prescribed  by  the  by-laws,  in  order  to  prevent  possi- 
ble conflicts  of  authority.  This  is  the  more  necessary,  as  the 
duties  of  the  position  are  not  so  definite  or  well  understood  as 
those  of  the  other  officials  and  custom  cannot  be  referred  to 
for  missing  details. 

The  general  manager  is  only  accounted  an  officer  of  the 
company — in  contradistinction  to  the  employees — because  he  is 
selected  by  and  usually  reports  to  the  board.  His  position  gen- 
erally differs  materially  from  that  of  the  other  officials.  At 
times  he  is  instructed  to  report  and  act  under  the  direction  of 
the  president.  If  the  by-laws  did  not  specifically  provide  for 
the  election  of  a  general  manager,  the  board  would  have 
authority  to  appoint  or  employ  such  official  and  prescribe  his 
duties  and  salary,  just  as  they  might  employ  any  other  neces- 
sary agent  or  employee  of  the  company.  In  such  case  the 
usual  laws  and  customs  relating  to  the  contract  of  employment 
would  control. 

§  173.  Counsel;  Auditor. 

In  the  larger  corporations  counsel  is  usually  retained  as  a 
regular  and  permanent  feature  of  the  management.  Such 
official  has  no  original  powers,  even  his  control  of  litigation 
being  subject  to  the  direction  of  the  board,  or,  if  it  be  so 
referred,  to  one  of  the  standing  committees. 


178  THE    BY-LAWS. 

In  the  smaller  corporations  by-law  provision  for  counsel 
is  not  usual,  the  board  being  left  to  employ  counsel  at  such 
times  and  on  such  terms  as  it  may  deem  expedient.  The 
employment  of  counsel  then  becomes  merely  a  matter  of 
contract. 

The  compensation  of  counsel  is  usually  fixed  at  some 
minimum  amount,  which  is  considered  a  retainer,  any  further 
payments  depending  upon  the  services  rendered. 

The  auditor  is  usually  an  essential  officer  of  the  larger 
corporations.  Where  the  work  that  may  properly  be  referred 
to  the  auditor  is  not  sufficient  to  justify  his  regular  employ- 
ment, the  by-laws  may  provide  for  periodical  audits,  or  the 
whole  matter  may  be  left  to  the  discretion  of  the  board.  Where 
the  volume  of  corporate  business  is  at  all  large,  the  employ- 
ment of  an  auditor  or  some  provision  for  suitable  audits  of 
the  corporate  books  and  accounts  is  a  wise  precaution. 

§  174.  Assistant  Officers. 

The  president  is  usually  well  provided  with  assistant 
officers  in  the  vice-presidents.  The  treasurer  is  frequently 
materially  assisted  by  the  personnel  of  the  finance  committee. 
Where  this  is  not  the  case,  and  sometimes  in  addition  thereto, 
an  assistant  treasurer  is  not  unusual.  In  the  larger  corpo- 
rations an  assistant  secretary  is  frequently  appointed. 

Such  official  duties  as  the  board  may  deem  expedient  are 
delegated  to  these  assistant  officers,  or  their  duties  may  be 
prescribed  at  discretion  by  the  officials  they  assist.  In  any 
event,  the  by-laws  should  clearly  prescribe  their  status  and 
manner  of  appointment.  If  these  assistant  officers  are  to  per- 
form the  duties  of  their  principals  in  the  absence  of  these  latter, 
the  by-laws  should  so  prescribe. 

In  the  smaller  corporations  assistant  officers,  outside  of 
the  vice-presidents,  would  be  an  unnecessary  and  possibly 
complicating  addition  to  the  corporate  mechanism. 


OFFICERS.  179 

§  175.  Delegation  of  Official  Powers.     * 

Exigencies  may  arise  in  which  it  may  be  desirable  or  even 
necessary  for  one  official  to  exercise  the  powers  and  perform 
the  duties  of  another,  in  whole  or  in  part.  The  board  would 
have  authority  to  temporarily  delegate  the  powers  of  certain 
officers  under  such  circumstances  without  special  by-law  pro- 
vision, but  to  save  question  and  possible  trouble,  the  power, 
if  likely  to  be  necessary,  should  be  specifically  conferred  by 
the  by-laws.  One  official  could  not  delegate  his  powers  to 
another,  even  temporarily,  in  any  material  matter,  unless 
specially  authorized  thereto  by  the  by-laws  or  action  of  the 
board. 

§  176.  Salaries. 

Officers  are  distinguished  from  employees  by  the  fact  that 
unless  it  is  specified  that  they  are  to  receive  salaries  they  are  not, 
as  a  rule,  entitled  to  charge  for  their  official  services.  Neither  is 
it  ordinarily  legal  for  the  directors  to  vote  a  salary  for  such 
services  after  they  are  performed.  To  avoid  misunderstand- 
ing, however,  it  should  be  clearly  stated  in  the  by-laws,  either 
that  the  officers  of  the  corporation  shall  receive  no  salaries,  or 
that  the  officers  shall  receive  only  such  compensation  for  their 
services  as  the  board  may  designate  at  the  time  of  their 
appointment,  or  the  salary  attached  to  each  office  may  be 
specifically  stated.  The  whole  matter  is  one  to  be  adjusted 
from  a  business  standpoint  and  much  trouble  is  likely  to  be  saved 
by  a  definite  arrangement.  (See  Henry  Woods  Sons'  Co.  vs. 
Schaefer,  173  Mass.,  443,  1899;  Met.  El.  R.  Co.  vs.  Knee- 
land,  120  N.  Y.,  134,  1890;  Ellis  vs.  Ward,  137  111.,  509, 
1890;  Kilpatrick  vs.  Penrose  F.  B.  Co.,  49  Pa.  St.,  118,  1865.) 

If,  however,  such  an  officer  is  neither  stockholder  nor 
director  of  the  company  and  stands  in  no  relation  which  would 
make  it  his  interest  to  serve  without  compensation,  there  will 
be  a  prima  facie  obligation  to  pay  him.  (Smith  vs.  Long 
Island  R.  R.  Co.,  102  N.  Y.,  190,  1886.) 


180  THE    BY-LAWS. 

Officers  who  are  also  directors  cannot  vote  salaries  to  them- 
selves even  though  they  are  also  holders  of  a  majority  of  the 
stock.  (Jacobson  vs.  B.  Lumber  Co.,  184  N.  Y.,  152,  1906.) 
But  an  officer  who  is  also  a  stockholder  and  director  may  re- 
cover for  services  rendered  outside  his  official  duties  if  such 
services  are  authorized  by  the  directors.  (Bagby  vs.  Carthage, 
etc.,  Co.,  165  N.  Y.,  179,  1900;  Corinne  Mill  Co.  vs.  Toponce, 
152  U.  S.,  405,  1893.) 

§  177.  Removals;  Vacancies. 

The  power  of  removal  and  the  filling  of  vacancies  is 
usually  provided  for  in  the  by-laws  under  the  head  of 
"  Directors,"  as  already  discussed  in  Section  159.  It  would 
be  proper,  however,  to  repeat  any  powers  given  the  board  in 
this  direction,  in  a  short  by-law  under  the  heading  of  officers, 
or  the  ground  might  be  covered  by  a  reference  to  the  by-law 
by  which  this  power  was  conferred.  If  the  occasion  arises 
for  the  exercise  of  the  power  of  removal,  or  it  becomes  neces- 
sary to  fill  a  vacancy,  there  should  be  no  possible  basis  for  any 
doubt  or  question  as  to  the  authority  of  the  directory  to  act. 


CHAPTER  XXVIII. 
DIVIDENDS   AND    FINANCE. 


(See  Art.  V  in  Forms  8  and  9;  also  Art.  VI  in  Form  10.) 

§  178.  General. 

All  those  provisions  directly  relating  to  the  financial 
management  of  the  corporation  will  be  grouped  in  the  by- 
laws under  the  general  heading  of  "  Dividends  and  Finance." 
Any  limitations  on  the  control  exercised  by  the  directors 
over  the  finances  of  the  corporation,  and  any  directions  as 
to  the  management  of  these  finances,  must,  unless  incor- 
porated in  the  charter,  appear  in  the  by-laws.  If  this  is 
not  done  the  directors  are  in  complete  control,  except  in 
so  far  as  they  may  be  restrained  by  statute  law. 

It  is  to  be  noted  that  any  restrictions  on  the  salaries  of 
officials,  if  of  a  general  nature,  would  appear  in  the  by-laws 
relating  to  finance.  If  the  amount  of  each  official  salary 
were  fixed,  such  limitations  might  appear  in  these  by-laws, 
but  would  also  be  included  in  the  by-laws  relating  to  the 
respective  officers. 

§  179.  Dividends. 

The  by-law  provisions  on  this  subject  are  for  the  most 
part  merely  declaratory  of  the  common  or  statutory  law  on 
the  subject.  Their  inclusion  in  the  by-laws  is  very  desirable, 
not  only  on  account  of  the  importance  of  the  matter,  but 
because  the  statutory  or  common  law  provisions  against 
illegal  dividends  are  otherwise  frequently  overlooked  or 
disregarded. 

181 


182  THE    BY-LAWS. 

§  1 80.  Reserve  Funds. 

Under  the  laws  of  most  states  the  directors  have  full 
power,  unless  otherwise  provided  by  charter  or  by-laws,  to 
set  aside  any  portion  or  all  of  the  profits  at  their  discretion 
as  a  reserve  fund  or  for  the  purpose  of  accumulating  a 
working  capital.  In  New  Jersey,  on  the  contrary,  the 
directors,  unless  otherwise  expressly  authorized  by  charter 
or  by-laws,  must  annually  distribute  all  the  corporate 
profits  as  dividends.  Such  compulsory  distribution  of 
profits  might  at  times  be  prejudicial  and  even  disastrous 
to  the  corporate  interests,  and,  accordingly,  it  is  usual  in 
New  Jersey  to  authorize  the  accumulation  of  a  reserve  fund 
by  charter  or  by-law  provisions. 

In  other  states  the  matter  of  reserves  is  sometimes  left 
entirely  to  the  discretion  of  the  directors,  but  usually  the 
matter  is  regulated  by  suitable  provisions.  The  minimum 
reserve  fund  to  be  maintained  will  be  prescribed  in  which 
case  no  dividends  must  be  paid  while  the  reserves  are  below 
this  minimum,  or  a  stipulated  annual  dividend  will  be 
required  from  the  annual  profits  before  anything  is  passed 
to  the  reserve,  or  a  certain  percentage  of  the  annual  profits 
will  be  passed  to  the  reserve  fund.  Whatever  the  arrange- 
ment it  should  be  so  clearly  expressed  as  to  admit  of  no 
misunderstanding. 

§  181.  Limitations  of  Debt. 

By-law  restrictions  upon  the  power  of  the  directors  to 
incur  debt  are  at  times  employed.  These  limitations  are  of 
various  forms.  At  times  the  debt  incurring  power  of  the 
board  will  be  limited  to  a  stated  gross  amount  which  must 
not  be  exceeded  without  special  authorization  by  the  stock- 
holders ;  or  it  may  be  provided  that  such  limit  of  indebtedness 
shall  not  be  exceeded  unless  authorized  by  a  specified 
majority  of  the  directors,  as  a  two-thirds  vote  of  the  entire 
board,  or  perhaps  by  unanimous  action  of  that  body.  Occa- 
sionally the  board  will  be  restricted  as  to  the  amount  of  any 


DIVIDENDS    AND    FINANCE.  183 

one  contract  or  obligation,  as  for  instance  that  no  contract 
or  obligation  involving  liabilities  of  more  than  $2,000  shall 
be  entered  into  or  incurred  by  the  board  unless  specifically 
authorized  thereto  by  resolution  of  the  stockholders. 

The  advisability  of  such  limitations  is  open  to  question. 
Peculiar  cases  will  undoubtedly  arise  where  such  restric- 
tions are  desirable,  and  at  times  they  are  necessary,  but  as 
a  general  rule  it  would  seem  better  to  elect  a  responsible 
board  rather  than  to  attempt  restraints  upon  its  action. 
(See  §§  107,  116,  117,  236  and  243.) 

§  182.  Bank  Deposits. 

The  by-law  provisions  as  to  the  corporate  bank  deposits 
are  important  and  should  be  very  explicit  in  their  terms. 
They  should  prohibit  absolutely  any  irregular  retention  or 
disposition  of  the  funds  by  the  treasurer,  and  provide  that 
all  moneys  coming  into  his  hands  be  promptly  deposited  in 
the  name  of  the  company.  This  latter  point  should  be 
covered  specifically  by  the  by-laws,  as  the  occasional  prac- 
tice of  allowing  deposits  to  be  made  in  the  individual  name 
of  the  treasurer,  or  in  his  name  as  treasurer,  is  a  standing 
invitation  to  irregularities  and  resulting  trouble. 

The  by-laws  should  also  prescribe  the  signature  to  cor- 
porate checks.  Practice  varies  as  to  this  matter  but  unless 
there  is  reason  for  doing  otherwise  checks  should  be  signed 
with  the  company  name,  affixed  by  the  treasurer  and  veri- 
fied by  his  signature,  with,  usually,  a  countersignature 
affixed  by  the  president. 

The  by-laws  relating  to  bank  deposits  should  cover  the 
ground  fully  and  clearly,  leaving  nothing  to  the  discretion 
of  the  board  or  finance  committee  save  the  designation  of 
the  depositaries. 


CHAPTER  XXIX. 
SUNDRY  PROVISIONS. 


(See  Art.  VI  in  Forms  8  and  9;  also  Art.  VII  in  Form  10.) 
§  183.  General. 

Under  this  head  will  come  all  those  by-laws  that  cannot  be 
included  under  the  titles  already  discussed  and  that  are  too 
few  or  unimportant  to  justify  separate  classification.  Some  of 
these  matters  are  of  particular  application.  A  few  are  of 
general  application,  are  found  in  all  complete  sets  of  by-laws 
and  are  considered  in  the  following  sections  of  the  present 
chapter. 

§  184.  Corporate  Seal. 

It  is  customary  to  prescribe  the  details  of  the  corporate 
seal  in  the  by-laws,  the  provision  being  usually  so  worded  as 
to  serve  as  a  formal  adoption  of  the  described  seal.  This  seal 
usually  gives  the  corporate  name,  the  year  and  the  state  of  in- 
corporation. These  are  customary,  but  not  essential,  as  any  other 
wording  or  device,  if  properly  adopted,  would  be  the  legal 
seal  of  the  corporation.  Any  additional  designs,  mottoes  or 
ornamentation  may  be  added  as  desired  and  will  neither  add 
to  nor  detract  from  the  legal  effectiveness  of  the  seal. 

§  185.  Penalties. 

The  enforcement  of  by-laws  by  means  of  penalties  is  of 
doubtful  utility.  Cases  may  arise  where  penalties  may  be 
profitably  employed,  but  usually  such  measures  are  futile  and 
inadequate.  Where  the  power  of  removal  exists,  persistent 
disregard  of  the  by-laws  by  officials  of  the  corporation  would 

184 


SUNDRY   PROVISIONS.  185 

undoubtedly  be  proper  grounds  for  the  exercise  of  this  power. 
If  such  power  is  not  given  by  the  by-laws  or  statutes,  official 
disregard  of  the  by-laws  would  probably  be  sufficient  reason 
for  a  removal  on  common  law  grounds.  If  the  directors  act 
in  disregard  of  the  requirements  of  the  by-laws,  such  action 
is  illegal,  and  the  personal  liability  that  may  follow  is  a  much 
more  effective  penalty  than  anything  that  could  be  inflicted  by 
direct  by-law  provision. 

§  1 86.  Amendments. 

The  usual  by-law  provision  on  this  subject  requires 
majority  action  of  the  stockholders  for  amendment  of  the  by- 
laws. This  conforms  to  the  provisions  of  the  common  law. 
Where  greater  stability  is  desirable,  on  account  of  special  pro- 
visions incorporated  in  the  by-laws,  or  generally,  as  a  protec- 
tion to  minority  interests,  it  is  sometimes  provided  that  two- 
thirds  in  interest,  or  even  a  larger  proportion  of  the  stock- 
holders, must  vote  in  favor  of  any  amendment  before  it  is 
effected. 

Such  provisions,  merely  made  part  of  the  by-laws,  unless 
reinforced  in  some  way,  are  of  but  little  avail.  The  majority 
have  the  right  to  amend  and  repeal  the  by-laws,  and  it  cannot 
be  taken  from  them  by  a  mere  unsupported  by-law  inhibition. 
(Smith  vs.  Nelson,  18  Vt,  511,  1846.) 

Such  a  provision,  to  be  effective,  must  either  be  incor- 
porated in  the  charter,  or,  if  in  the  by-laws  only,  must  be  so 
established  and  confirmed  by  vested  rights  accrued  under  it  as 
to  have  become  in  effect  a  contract  between  the  corporation 
and  the  stockholders,  and,  therefore,  unchangeable,  except  in 
accordance  with  its  own  provisions.  The  New  York  Court 
of  Appeals  in  Kent  vs.  Quicksilver  Mining  Co.,  78  N.  Y.,  159 
(1879),  said: 

"  A  private  corporation  cannot  repeal  a  by-law, 
so  as  to  impair  rights  which  have  been  given  and 
become  vested  by  virtue  of  the  by-law;  and  this 
although  the  power  is  reserved  by  its  charter  to  alter, 
amend  or  repeal  its  by-laws." 


186  THE    BY-LAWS. 

This  is  stated  yet  more  strongly  in  Loewenthal  vs.  Rubber 
Reclaiming  Co.,  52  N.  J.  Eq.,  440,  a  case  where  stock  had 
been  sold  on  the  strength  of  the  safety  afforded  by  special 
charter  and  by-law  provision : 

"  The  certificate  of  organization  and  the  by-laws 
contemporaneously  adopted,  constituted  a  contract 
between  the  stockholders  and  the  corporation,  and 
it  is  not  competent  for  the  legislature  to  authorize 
either  to  be  changed  without  the  consent  of  all  the 
stockholders,  except  it  be  done  in  the  mode  provided 
by  the  by-laws  themselves."  See  also  Mills  vs.  Cent. 
R.  R.  Co.,  14  Stewart  Eq.,  i. 

It  is  worthy  of  note,  that  it  has  been  decided  in  Pennsylva- 
nia that  the  by-laws  cannot  be  amended  by  a  majority  of  the 
stockholders  at  an  annual  meeting  in  any  important  particular, 
such  as  an  increase  of  directors,  unless  the  notice  of  that  meet- 
ing informed  all  the  stockholders  that  such  action  was  con- 
templated. (Bagley  vs.  Reno,  etc.  Co.,  201  Pa.  St.,  78,  1902.) 


PART  V.-ORGANIZATION  OF  CORPORATION. 


CHAPTER  XXX. 
FIRST    MEETING    OF    STOCKHOLDERS. 


§  187.  General. 

In  the  great  majority  of  the  states  procedure  for  the 
organization  of  a  corporation  is  uniform  as  to  the  main 
features.  First,  the  charter  is  prepared  and  is  executed  by  the 
incorporators ;  next,  this  duly  executed  charter  is  filed  with  the 
officials  prescribed  by  statute,  then  the  meeting  of  incorpo- 
rators is  held,  by-laws  adopted,  directors  elected  and  such 
other  action  taken  as  may  be  necessary.  The  directors  then 
meet,  elect  the  officers  of  the  corporation  and  its  organization 
is  complete. 

In  a  few  states,  however,  this  procedure  is  practically  re- 
versed, the  election  of  directors  and  officers  and  adoption  of 
by-laws  preceding  the  filing  of  the  charter.  In  other  words, 
the  by-laws  are  adopted  and  directors  and  officers  elected 
before  the  corporation  has  any  legal  existence.  The 
arrangement  seems  somewhat  illogical,  but  is  prescribed  by 
the  statutes  of  certain  states  and  in  those  states  must  be  fol- 
lowed. It  merely  amounts  to  a  preliminary  determination  of 
these  details,  of  no  force  unless  the  charter  application  is 
allowed,  but  then  becoming  automatically  effective  and  bind- 
ing on  the  new  corporation.  This  variation  of  the  usual  pro- 
cedure is  found  in  Maine,  Massachusetts  and  some  other 
states.  In  these  states  the  proceedings  outlined  in  the  present 
and  following  chapters  must  be  modified  to  meet  the  statute 
requirements. 

187 


188  ORGANIZATION    OF    CORPORATION. 

Under  the  customary  procedure,  after  the  charter  applica- 
tion has  been  duly  submitted  for  approval  and  filing  in  the 
office  or  offices  designated  by  the  statutes,  and  after  such 
approval  and  filing  has  taken  place  and  been  notified  to  the 
incorporators,  these  latter  are  authorized  to  assemble  and  per- 
fect the  organization  of  the  new  corporation. 

The  incorporators  or  their  proxies  are  the  only  persons 
entitled  to  act  at  this  time.  Their  power  to  call  the  first  meet- 
ing and  to  act  thereat  for  the  corporation  is  derived  from  the 
recognition  and  express  authorization  given  them  by  statute. 
If  their  subscriptions  are  set  forth  in  the  charter  itself  each 
incorporator  votes  at  this  first  meeting  in  accordance  with  such 
stock  subscription.  In  those  states  where  the  first  meeting  is 
held  before  the  charter  is  granted,  each  incorporator  is  usually 
entitled  to  one  vote  in  the  organization  meeting. 

There  may  be  numerous  subscribers  to  the  stock  of  the 
new  corporation  who  are  not  named  in  the  charter,  but  their 
subscriptions  not  having  as  yet  been  accepted  by  the  new  cor- 
poration, the  subscribers,  as  such,  are  not  stockholders  of  the 
corporation  and  are  not  entitled  to  any  participation  in  its 
affairs  until  after  express  acceptance  of  their  subscriptions. 

Unless  there  is  some  good  reason  to  the  contrary,  the 
number  of  incorporators  is  usually  fixed  at  the  minimum 
allowed  by  the  statutes.  This  is  done  purely  as  a  matter  of 
convenience  and  as  simplifying  the  formalities  preliminary  and 
incident  to  the  first  meeting. 

Where  the  number  of  incorporators  is  small,  the  first  meet- 
ing is  most  conveniently  assembled  by  means  of  a  written  call 
and  waiver  of  notice,  which  must  be  signed  by  all  the  incor- 
porators. This  call  and  waiver  must  fix  the  time  and  place  of 
meeting,  and  should  also  specify  the  business  to  be  transacted 
thereat,  though,  by  reason  of  all  the  interested  parties  signing, 
so  much  particularity  is  not  necessary  as  in  the  call  for  the 
usual  special  meeting.  A  blanket  phrase  consenting  to  the 
transaction  of  any  and  all  business  brought  before  the  meeting 
is  in  this  case  allowable  and  authoritative.  Such  a  call  and 


FIRST    MEETING    OF    STOCKHOLDERS.  189 

waiver,  to  be  effective,  must  be  signed  by  every  incorporator. 
It  need  not  be  issued  or  signed  any  definite  time  before  the 
meeting,  as  it  is  a  waiver  of  all  statutory  requirements  of 
notice.  A  meeting  so  called  and  properly  conducted  is  legal 
in  any  state  of  the  Union.  (Braintree,  etc.  Co.  vs.  Braintree, 
146  Mass.,  482,  1881.) 

Where  for  any  reason  the  call  and  waiver  of  notice  cannot 
be  used,  any  form  or  method  of  procedure  prescribed  by  the 
statutes  for  the  assembling  of  the  first  meeting  should  be  fol- 
lowed to  the  letter.  If  no  form  is  prescribed  by  the  statutes 
it  will  be  necessary  for  a  majority  of  the  incorporators  to 
unite  in  a  call  for  the  first  meeting.  This  call  must  fix  the 
time,  place  and  business  to  be  transacted  at  the  meeting,  and 
must  be  served  on  the  other  incorporators  a  reasonable  time 
before  the  date  of  meeting.  Any  convenient  place  of  meeting 
may  be  selected,  the  time  of  notice  must  be  sufficient  to  permit 
all  the  incorporators  to  be  conveniently  present,  and  the  busi- 
ness to  be  transacted  should  be  set  forth  in  detail.  The  meet- 
ing is  practically  nothing  more  than  a  special  meeting  of  the 
stockholders,  and,  in  the  absence  of  statutory  prescription,  its 
notice  should  follow  the  general  rules  in  regard  to  notice  for 
special  meetings. 

§  1 88.  Preparation  of  Minutes. 

The  first  meeting  of  stockholders,  and  usually  the  first 
meeting  of  the  directors  as  well,  are  of  the  cut  and  dried  order. 
The  incorporation  has  been  undertaken  for  a  specific  purpose 
and  usually  by  certain  people,  who  have  already  settled  among 
themselves  just  how  the  corporation  is  to  be  organized  in  all 
main  details.  The  organization  meetings  are  merely  a  formal 
execution  of  these  prearranged  plans.  It  is,  therefore,  cus- 
tomary to  have  the  minutes  of  these  first  meetings  written  out 
in  advance  and  often  with  much  particularity.  The  advantages 
of  the  plan  are  found  in  the  orderly  procedure  thereby  outlined, 
the  better  presentation  of  the  matters  to  be  considered  and  the 
inclusion  of  all  matters  that  ought  to  be  considered.  If  any- 


190  ORGANIZATION    OF   CORPORATION. 

thing  occurs  at  or  during  the  time  of  the  meeting  to  modify 
the  minutes  as  already  written,  the  necessary  changes  are 
quickly  made  by  erasure  or  interlineation  and  no  confusion 
need  result.  (See  Forms  36-40.) 

§  189.  Method  of  Conducting  Meeting. 

The  manner  of  conducting  the  first  meetings  varies  widely 
with  the  conditions.  In  certain  cases,  where  everything  is 
settled  in  advance,  and  is  to  be  kept  in  the  precise  shape  deter- 
mined upon,  the  entire  minutes  are  put  in  final  shape  before 
the  time  of  meeting.  Then  the  attorney,  or  other  party  having 
the  incorporation  in  hand,  after  due  assembling  of  the 
incorporators,  reads  to  them  these  cut  and  dried  minutes  as 
the  proceedings  of  the  meeting.  With  the  assent  of  those 
present,  or  in  the  absence  of  express  objection,  the  minutes 
so  presented  are  declared  to  be  the  minutes  of  the  meeting, 
which  is  thereupon  adjourned.  The  minutes  are  then  tran- 
scribed in  the  minute  book,  are  signed  by  the  parties  respec- 
tively mentioned  in  the  minutes  as  the  presiding  officer  and 
secretary  and  the  matter  is  closed.  The  directors'  meeting  is 
conducted  in  the  same  perfunctory  manner  and  with  the  same 
precision  of  result. 

This  method  though  informal  and  irregular  cannot  be 
said  to  be  illegal.  The  presence  of  all  the  parties  in  interest 
and  their  assent  and  active  participation,  acts  to  estop  them 
from  objecting  to  the  proceedings  and  no  one  else  would 
have  the  right  to  object. 

It  is  needless  to  say  that  when  this  method  is  employed 
the  incorporators  are  generally  dummies,  who,  after  the 
completion  of  the  organization,  step  aside  and  make  way 
for  the  real  parties  in  interest. 

When  the  exact  proceedings  of  the  minutes  are  to  be 
carried  out,  but  the  attorney  in  charge  is  unwilling  for  it 
to  be  so  purely  a  matter  of  form,  the  minutes  will  be  read 
but  the  parties  named  therein  will  go  through  the  indicated 
motions.  Thus  if  the  minutes  state  that  the  charter  is  pre- 


FIRST    MEETING    OF    STOCKHOLDERS.  191 

sented  by  the  president,  or  chairman,  a  copy  of  the  charter 
will  be  handed  the  party  named  in  the  minutes  as  the  pre- 
siding officer  and  the  minutes  verified  by  its  due  presenta- 
tion to  the  meeting.  Likewise  the  parties  named  as  making 
and  seconding  motions  will  be  asked  if  they  make  and 
second  such  motions,  their  ready  assent  usually  verifying 
the  predictions  of  the  minutes  to  a  nicety.  Also  as  each 
motion  is  reached  in  the  reading,  the  meeting  will  be  asked 
if  it  favors  such  motion,  the  assent  of  the  meeting  usually 
being  readily  obtained.  Such  a  meeting  is  much  less  of  a 
legal  fiction  than  the  meeting  conducted  entirely  by  the 
reading  of  the  minutes  and  is  to  be  preferred. 

Where  the  real  parties  in  interest  participate  in  the  first 
meetings  the  proceedings  are  not  usually  of  such  a  per- 
functory nature.  The  minutes  then  serve  more  as  a  detailed 
order  of  business  and  are  varied  as  the  needs  of  the  occasion 
seem  to  indicate.  The  presiding  officer  really  presides,  the 
secretary  performs  his  functions,  motions  are  made  and  any 
elections  actually  take  place,  discussions  are  in  order  if  the 
necessity  arises,  and,  in  short,  the  assemblage  is  a  meeting 
intelligently  acting,  and  not  a  collection  of  dummies,  useful 
only  as  pegs  upon  which  to  hang  the  prescribed  proceedings. 

In  the  comments  which  follow,  it  has  been  taken  for 
granted  that  the  actions  of  the  meeting  are  to  be  really 
taken. 

§  190.  Opening  the  Meeting. 

At  the  duly  appointed  time  and  place,  the  incorporators, 
or  a  majority  of  them,  having  assembled,  some  one  of  those 
present  will  call  the  meeting  to  order,  and,  in  the  absence 
of  objection  thereto,  will  call  on  some  other  incorporator 
present  to  take  the  chair.  If  there  should  be  any  objection 
to  the  appointee,  or  to  the  selection  of  a  chairman  by  ap- 
pointment, the  party  calling  the  meeting  to  order  would  let 
the  matter  be  decided  by  vote.  The  chairman,  as  soon  as 
his  appointment  or  election  is  announced,  will  take  charge 


192  ORGANIZATION    OF    CORPORATION. 

of  the  meeting  and,  if  there  is  no  objection  thereto,  appoint 
some  one  present  to  act  as  secretary.  The  secretary  will 
then  note  the  names  of  those  present  and  ask  for  the  proxy 
of  any  one  of  the  incorporators  not  present  in  person.  It 
is  desirable  to  have  all  the  incorporators  represented  at  this 
first  meeting,  though  a  majority  in  interest  could  legally  act. 
The  secretary  should  now  produce  proper  evidence  that 
the  meeting  has  been  duly  called  and  this  evidence  should 
be  ordered  spread  upon  the  minutes.  If  the  meeting  has 
been  assembled  by  call  and  waiver  signed  by  all  the  incor- 
porators, such  call  and  waiver  should  be  produced  and 
ordered  entered  in  the  minutes  of  the  meeting.  If  called 
by  publication,  copies  of  the  newspapers  in  which  the  notice 
appeared  would  be  adequate  evidence.  If  called  by  notice 
served  personally  or  by  mail,  a  copy  of  the  notice  should 
be  presented  accompanied  by  a  certificate  of  the  party  by 
whom  it  was  served  that  such  service  was  duly  effected.  If 
the  meeting  assembled  in  any  other  way,  the  procedure  and 
the  evidence  that  it  had  been  properly  carried  out  should  be 
laid  before  the  meeting  and  should  appear  in  the  minutes. 

§  191.  Reception  of  Charter. 

The  chairman  or  secretary  should  now  produce  a  copy 
of  the  certificate  of  incorporation,  and  report  the  fact  and 
date  of  its  allowance  and  of  its  filing  in  the  office  or  offices 
required  by  the  statutes.  Motion  should  then  be  made  that 
the  certificate  of  incorporation  as  presented  be  accepted  or 
received  and  spread  upon  the  minutes  as  a  part  of  the 
record  of  the  meeting. 

It  is  not  essential  that  this  copy  of  the  charter  be  certi- 
fied by  the  Secretary  of  State,  though  such  certified  copy 
is  customarily  procured  and  is  generally  more  satisfactory 
to  the  interested  parties  than  an  uncertified  copy.  The 
charter  is  entered  preferably  on  the  first  pages  of  the  minute 
book,  followed  by  the  by-laws,  with  the  other  instruments 
that  are  made  part  of  the  record  following  the  minutes 


FIRST    MEETING    OF    STOCKHOLDERS.  193 

proper,  each  beginning  at  the  head  of  a  page.  So  arranged, 
these  instruments  are  much  more  easily  found  and  referred 
to  than  if  incorporated  and  buried  in  the  body  of  the  minutes. 
Also  the  minutes  themselves  are  clearer  and  more  intel- 
ligible if  not  broken  up  by  the  interjection  of  the  lengthy 
instruments  ordered  spread  upon  the  minutes.  The  legal 
effect  of  the  entry  of  these  instruments  in  the  way  indicated, 
if  so  ordered  by  the  meeting,  is  exactly  the  same  as  if  they 
appeared  in  the  context. 

§  192.  Adoption  of  By-Laws. 

The  by-laws  will  usually  have  been  prepared  in  advance 
of  the  first  meeting  and  have  been  fully  considered  by  those 
interested.  At  the  time  of  the  meeting,  they  are  presented, 
read  article  by  article  by  the  secretary  or  by  such  other 
party  as  may  be  requested  thereto  by  the  presiding  officer, 
and  adopted  as  a  whole.  At  times  each  article  will  be 
adopted  as  read,  followed  by  the  adoption  of  the  by-laws 
as  a  whole,  though  this  is  not  a  necessary  formality. 

If  serious  objection  is  offered  to  any  of  the  by-law  provi- 
sions, such  objection  will  be  taken  under  consideration  by 
the  meeting  and  any  proposed  modifications  settled  by  for- 
mal action.  As  the  time  at  this  first  meeting  is,  however, 
usually  fully  occupied  with  routine  procedure,  such  matters 
cannot  be  given  the  consideration  they  deserve  and  any 
objections  or  suggestions  in  regard  to  the  by-laws  should 
be  discussed,  and,  if  possible,  settled  before  the  meeting. 

Where  the  by-laws  have  been  fully  considered  by  the 
interested  parties  in  advance  of  the  meeting  and  all  are 
familiar  with  their  provisions,  the  reading  of  the  by-laws 
may,  either  by  unanimous  consent,  or  by  formal  motion, 
be  dispensed  with  and  the  by-laws  adopted  as  presented  and 
as  a  whole.  The  reading  of  the  by-laws  before  adoption  is, 
however,  the  safer  plan,  preventing  any  unauthorized  sub- 
stitutions with  possible  resulting  disagreement  later  as  to 
just  what  was  adopted. 


194  ORGANIZATION    OF    CORPORATION. 

§  193.  Election  of  Directors. 

In  most  of  the  states  the  election  of  directors  properly 
follows  the  adoption  of  the  by-laws,  such  election  being  the 
only  method  by  which  the  directors  may  be  properly  desig- 
nated and  empowered.  In  New  York  and  in  some  other 
states,  however,  the  directors  for  the  first  corporate  year 
are  named  in  the  charter.  In  such  case  no  action  in  regard 
to  the  directors  is  necessary  at  the  first  stockholders'  meet- 
ing, the  board  being  already  in  existence  with  full  power  to 
take  up  and  manage  the  affairs  of  the  corporation.  If  the 
incorporators  do  not  meet  at  this  time,  the  board  would, 
pending  such  meeting,  of  necessity,  be  forced  to  adopt  by- 
laws of  more  or  less  completeness.  To  avoid  any  such  con- 
tingency and  to  avoid  other  possible  inconvenience,  it  is 
the  better  practice  in  these  as  in  other  states  to  have  the 
stockholders  meet  prior  to  any  meeting  or  action  of  the 
board. 

Where  directors  are  to  be  elected  at  the  incorporators' 
meeting,  any  statutory  directions  must  be  followed  exactly 
and  the  minutes  should  show  in  detail  that  this  has  been 
done.  In  the  absence  of  statutory  provisions,  an  election 
by  ballot,  conducted  by  tellers  appointed  by  the  presiding 
officer  would  be  legal  and  proper.  In  such  case  the  meeting 
would  be  the  judge  of  the  qualifications  of  voters,  each 
incorporator  or  other  participant  voting  according  to  the 
number  of  shares  of  stock  subscribed  for  by  him.  If  an 
agreement  exists  as  to  the  parties  to  be  elected  as  directors, 
these  parties  might  be  nominated  by  the  meeting  and  the 
secretary  by  motion  instructed  to  cast  the  vote  of  the 
meeting  for  the  parties  so  nominated. 

§  194.  Exchange  of  Stock  for  Property. 

The  board  of  directors  is  the  proper  and  final  authority 
to  conclude  an  exchange  of  stock  for  property.  Where, 
however,  as  is  often  the  case,  a  large  proportion  or  pos- 
sibly all  the  stock  of  the  corporation  is  to  be  issued  in  pay- 


FIRST    MEETING    OF    STOCKHOLDERS.  195 

ment  for  some  particular  property,  it  is  customary  and 
advisable  to  have  the  proposed  purchase  sanctioned  and 
authorized  by  express  action  of  the  stockholders.  Such 
action  if  unanimous  commits  all  the  stockholders  to  the 
purchase,  and  estops  any  participant  from  later  objection 
to  the  transaction. 

The  proposal  for  exchange  of  stock  for  property  is 
usually  presented  to  the  meeting,  read,  discussed  if  desired, 
and  then  a  resolution  passed  approving  the  proposed  pur- 
chase, referring  it  to  the  directors  and  instructing  them  to 
consummate  the  same.  (See  Chap.  XXXII,  Issuance  of 
Stock  for  Property.) 

§  195.  Other  Business. 

Usually  there  will  be  other  business  to  come  before  the 
stockholders  at  this  first  meeting  depending  upon  the  con- 
ditions surrounding  the  particular  corporation.  In  some 
states  specific  action  is  required  of  the  stockholders  by  the 
statutes.  If  there  is  any  action  to  be  taken  by  the  directors 
in  which  there  is  doubt  of  their  power,  or  some  advantage 
to  be  gained  by  an  authorization  from  the  stockholders,  the 
necessary  action  should  be  taken  at  this  time.  Beyond 
this,  however,  it  is  not  advisable  for  the  stockholders  to  go. 
All  matters  of  general  management  are  in  the  hands  of  the 
board  and  any  uncalled  for  action  in  regard  thereto  on  the 
part  of  the  stockholders  can  have  no  advantageous  results 
and  may  embarrass  the  proper  action  of  that  body. 


CHAPTER  XXXI. 
FIRST    MEETING    OF    DIRECTORS. 


§  196.  General. 

In  the  majority  of  the  states,  the  directors  of  a  new  cor- 
poration are  elected  at  the  first  meeting  of  stockholders, 
and,  of  necessity,  the  first  board  meeting  is  held  subsequent 
thereto.  Even  in  those  states  where  by  charter  appoint- 
ment of  the  board,  that  body  might  meet  in  advance  of  the 
first  meeting  of  stockholders,  the  general  practice  is  for 
the  meeting  of  stockholders  to  precede  the  first  meeting 
of  the  board. 

At  their  first  meeting  the  stockholders  usually  adopt 
by-laws.  The  board  in  its  first  meeting  has  therefore  the 
guidance  of  these  by-laws  so  far  as  they  may  apply.  As  the 
first  meeting  of  the  board  is  not  a  regular  meeting,  it  is 
governed  by  the  by-law  provisions  relating  to  special  meet- 
ings, except  as  variations  are  made  necessary  by  the  unor- 
ganized condition  of  the  board  at  this  time. 

No  secretary  having  as  yet  been  elected,  the  meeting 
cannot  be  called  or  assembled  as  it  otherwise  might  but 
must  either  be  assembled  by  a  call  signed  by  a  majority  of 
the  members  of  the  board,  such  call  being  in  its  general 
form  similar  to  the  usual  call  for  special  meetings  and  com- 
plying in  every  way  with  its  requisites,  or  otherwise,  and 
as  is  usually  done,  the  meeting  must  be  brought  together 
by  a  written  call  and  waiver  of  notice,  which  must  be  signed 
by  all  the  members  of  the  board.  This  instrument  should 
specify  the  time  and  the  place  of  meeting,  and  give  in  detail 
the  various  matters  to  be  considered  and  acted  upon.  If  the 
stockholders  have  selected  any  office  or  definite  headquar- 

196 


FIRST    MEETING    OF    DIRECTORS.  197 

ters  for  the  new  corporation^  the  meeting  of  the  directors 
would  naturally  be  called  for  that  place,  if  not,  any  conven- 
ient place  would  be  proper.  The  most  important  matters 
for  consideration  at  this  meeting  are  the  election  of  officers, 
the  issuance  of  stock  for  property — where  this  is  to  be  done 
— and  the  authorization  of  any  proceedings  necessary  to 
the  commencement  of  business.  A  blanket  provision  per- 
mitting the  transaction  of  any  and  all  business  pertaining 
to  the  affairs  of  the  corporation  should  be  included  in  the 
call  and  waiver.  Signed  by  the  entire  membership  of  the 
board  this  provision  would  be  effectual  and  would  permit 
action  on  any  corporate  matters  that  may  come  up  for  con- 
sideration. At  times  this  latitude  of  action  is  of  considerable 
advantage. 

§  197.  Minutes. 

As  in  the  case  of  the  stockholders'  first  meeting,  the  pro- 
ceedings of  the  first  meeting  of  directors  may  usually  be  antici- 
pated and  minutes  be  prepared  in  advance  with  considerable 
accuracy.  Occasionally  in  such  case,  the  minutes  are  pre- 
pared in  permanent  form  and  the  proceedings  conducted  in 
accordance  by  a  mere  reading  of  the  minutes — their  adoption 
as  the  minutes  of  the  meeting  being  signified  by  silent  ac- 
quiescence, by  express  assent  or  by  a  more  particularized 
assent  on  each  important  point  as  the  reading  progresses. 
Usually,  however,  the  prepared  minutes  are  used  more  as 
memoranda,  the  meeting  at  least  going  through  the  motions 
of  transacting  the  outlined  business. 

It  is  hardly  necessary  to  say,  that  "  cut  and  dried  ' 
minutes  should  not  be  prepared  or  used  where  there  is  any 
probability  of  a  difference  of  opinion  in  the  board.  Courtesy 
would  forbid,  even  if  there  were  a  decided  majority  in  favor  of 
the  outlined  action.  Also,  speaking  generally,  it  would  neither 
be  politic  nor  advisable  to  ignore  so  openly  the  consideration 
and  deliberation  which  should  in  any  case  of  disagreement  be 
characteristic  of  board  action.  (See  Forms  41-45.) 


198  ORGANIZATION    OF    CORPORATION. 

§  198.  Opening  the  Meeting. 

When  the  board  assembles  in  its  first  meeting  it  is 
unorganized  and  must  therefore  be  called  to  order  by  some 
one  of  its  members,  who,  on  his  own  volition,  or  at  the  request 
of  other  members,  takes  the  initiative.  This  member  merely 
calls  the  meeting  to  order,  and,  in  the  absence  of  objection, 
names  a  temporary  chairman  or  presides  until  a  temporary 
chairman  is  appointed  or  elected  by  the  meeting.  This  latter 
then  takes  the  chair  and  a  temporary  secretary  is  at  once 
appointed  or  elected.  This  completes  the  temporary  organiza- 
tion of  the  board. 

The  call,  or  call  and  waiver,  or  other  authorization  under 
which  the  meeting  has  assembled,  should  then  be  presented 
to  the  meeting,  and,  if  it  appears  that  the  meeting  has  been 
duly  assembled,  the  evidence  thereof  should  be  ordered 
entered  on  the  minutes.  In  the  absence  of  objection  this  might 
be  so  ordered  by  the  presiding  officer,  otherwise  by  formal 
action.  As  the  meeting  is  a  special  meeting  it  is  important 
that  it  shall  have  been  properly  called  and  that  due  record  be 
made  of  this  fact. 

A  roll  call,  or  its  equivalent,  the  recording  of  those  present 
by  the  secretary  completes  the  opening  formalities  and  the 
meeting  is  ready  for  business. 

§  199.  Election  of  Officers. 

If,  as  is  almost  invariably  the  case,  the  officers  of  the  cor- 
poration are  to  be  elected  by  the  board,  their  election  is  the 
first  business  before  the  meeting.  The  by-laws  already 
adopted  by  the  stockholders  should  designate  the  officers  to  be 
elected  and  the  manner  of  their  election,  and  these  require- 
ments should  be  strictly  followed.  Generally  the  election  is 
by  ballot.  Candidates  for  the  various  offices  might  be  sev- 
erally nominated  with  due  second  thereto,  but,  as  usually  the 
candidates  for  the  various  offices  have  been  agreed  upon  in 
advance,  formal  nominations  are  dispensed  with  and  the  de- 
tails of  election  taken  up  at  once.  Where  all  are  agreed,  a 


FIRST    MEETING    OF    DIRECTORS.  199 

motion  is  frequently  passed  instructing  the  secretary  to  cast 
the  single  ballot  of  the  meeting  for  the  recited  list  of  officers. 
This  is  proper,  and,  at  times,  convenient. 

If  the  election  is  to  be  carried  out  in  detail,  the  presiding 
officer  will,  in  the  absence  of  objection,  appoint  tellers.  The 
members  of  the  board  then  prepare  their  respective  ballots 
and  the  tellers  collect  and  count  these  ballots  and  announce 
the  results.  Each  officer  may  be  balloted  for  separately,  or, 
as  is  usually  the  case,  one  ballot  be  made  to  serve  for  all  the 
officers. 

Immediately  after  the  election  the  newly-elected  president 
and  secretary,  if  present,  will  take  charge  of  the  meeting  and 
assume  their  respective  official  duties.  If,  however,  these 
officials-elect  are  absent,  or  if  anything  prevents  their  imme- 
diate assumption  of  their  duties,  the  temporary  officers  will 
continue  to  act  until  the  close  of  the  meeting,  unless  the  per- 
manent officers  sooner  take  charge.  If,  as  in  New  Jersey, 
the  secretary  is  required  to  be  sworn,  he  should  comply  with 
this  requirement  before  acting  in  his  official  capacity,  though 
his  failure  so  to  do  would  not  vitiate  his  records,  nor  affect  in 
any  way  the  legality  of  the  meeting. 

§  200.  Adoption  of  Stock  Certificate. 

The  stockholders  may,  if  they  so  desire,  either  by  reso- 
lution or  by-law  provision,  adopt  a  form  of  stock  certificate. 
The  matter  is  one,  however,  that,  on  account  of  its  nature,  is 
usually  left  to  the  discretion  of  the  board.  Frequently  tem- 
porary certificates  are  adopted,  to  be  replaced  later  by  more 
elaborate  permanent  certificates.  Changes  of  conditions  may 
occur  necessitating  change  in  the  certificate  originally  adopted. 
Other  contingencies  affecting  its  form  not  infrequently  arise. 
For  these  and  other  reasons  the  matter  is  one  best  handled  by 
the  board. 

Frequently  a  form  of  stock  certificate  will  have  been 
selected  and  possibly  printed  or  engraved  before  the  time  of 
the  first  board  meeting.  Even  if  this  be  so,  the  selected  form 


200  ORGANIZATION    OF   CORPORATION. 

should  be  formally  adopted  and  either  the  secretary  be  author- 
ized and  instructed  to  procure  the  necessary  books  of  stock 
certificates,  or,  if  the  books  have  already  been  procured,  such 
action  be  ratified  and  the  books  as  presented  be  accepted.  The 
resolution  by  which  this  is  effected  should  also  authorize  the 
secretary  to  provide  a  seal,  minute  book  and  such  other  cor- 
porate books  and  stationery  as  may  be  required. 

The  form  of  seal  is  customarily  determined  in  the  by- 
laws which  have  already  been  adopted  by  the  stockholders. 
If  this  is  not  the  case  the  form  of  seal  should  be  selected  and 
adopted  by  the  directors.  (See  Forms,  Chapter  XLVIII.) 

§  20 1.  Acceptance  of  Subscriptions. 

Subscriptions  made  by  the  incorporators  of  a  new  com- 
pany need  no  formal  acceptance.  The  mere  fact  of  their 
having  executed  the  charter,  in  which  their  subscriptions 
usually  appear,  and  of  having  participated  in  the  organiza- 
tion meetings  obviates  the  necessity  of  acceptance.  If  there 
are  other  subscribers  to  the  stock  of  the  new  company, 
such  other  subscriptions  require  formal  acceptance.  This  is 
accomplished  by  resolution  of  the  board  of  directors.  Such 
acceptance  completes  and  makes  binding  the  contract 
between  the  corporation  and  those  who  have  offered  to  take 
its  stock.  Neither  party  can  then  recede  and  the  sub- 
scribers, by  this  acceptance,  become  stockholders  of  the 
corporation  and  entitled  to  all  the  rights  of  stockholders. 
The  issue  of  certificates  to  these  stockholders  does  not 
usually  take  place  until  their  subscriptions  are  fully  paid 
and  then  is  only  a  convenient  method  of  evidencing  their 
status  not  affecting  their  rights  as  stockholders  one  way  or 
the  other.  If  they  do  not  fulfil  the  conditions  of  subscrip- 
tion their  stock  may  be  forfeited,  but  until  that  time  their 
rights  are  in  full  existence. 

The  acceptance  of  subscriptions  is  followed  by  such 
action  in  regard  to  the  payment  thereof  as  may  be  necessary. 
If  part  or  all  of  the  subscription  price  of  the  stock  were  due 


FIRST    MEETING   OF   DIRECTORS.  201 

on  acceptance,  the  treasurer  of  the  company  would  be  em- 
powered to  collect  the  amounts  due.  If,  as  in  New  Jersey, 
thirty  days'  call,  unless  waived  by  the  subscribers,  must  be 
made  before  any  part  of  the  subscription  price  of  stock  can 
be  collected,  either  the  board  would  instruct  such  call  to 
be  issued,  or,  as  is  usually  done,  would  secure  a  waiver  of 
this  condition  by  the  subscribers  and  take  immediate  steps 
for  the  collection  of  the  amounts  then  due. 

If  the  corporation  has  been  organized  with  the  minimum 
amount  of  subscriptions  permitted  by  the  statutes  and 
additional  subscriptions  are  necessary,  or  desired,  the  proper 
officers  of  the  corporation  would  be  instructed  to  offer  for 
sale  or  subscription  such  portion  of  the  capital  stock  as  is 
to  be  sold.  Such  action  would  be  governed  entirely  by  the 
conditions  of  the  particular  corporation. 

§  202.  Exchange  of  Stock  for  Property. 

If,  as  is  almost  invariably  the  case  with  business  corpora- 
tions of  the  present  day,  all  or  a  portion  of  the  corporate 
stock  is  to  be  issued  in  exchange  for  property,  the  matter 
is  usually  brought  before  the  first  meeting  of  the  board  by 
the  submission  of  a  formal  written  proposition  for  the 
exchange.  This  is  usually  accompanied  by  a  resolution 
of  the  stockholders  approving  the  exchange  and  instructing 
the  directors  to  accept  the  proposition.  These  matters 
are  usually  presented  with  proper  explanations  by  the 
presiding  officer,  but  may  with  entire  propriety  come 
through  the  secretary.  Usually  the  proposition  is  ordered 
received  and  spread  in  full  upon  the  minutes  of  the  directors' 
meeting.  If  already  in  the  stockholders'  minutes  this  would 
not  be  necessary,  but  preferably  the  proposition  should  be 
reserved  to  appear  in  the  directors'  minutes  in  connection 
with  the  final  action  taken  thereon. 

Usually  such  a  proposal  calls  for  little  discussion  as  the 
matter  has  already  been  fully  considered.  The  presentation 
and  formal  disposal  of  the  documents  in  the  case  is  there- 


202  ORGANIZATION   OF    CORPORATION. 

fore  generally  followed  by  a  formal  resolution  of  acceptance. 
This  resolution  should  briefly  recite  the  conditions,  specifi- 
cally accept  the  proposition,  and  instruct  the  officers  to  take 
the  necessary  steps  to  consummate  the  transaction.  It 
should  also  authorize  the  proper  officers  to  issue  the  stock 
consideration  and  deliver  it  against  the  delivery  of  the  duly 
assigned  property  for  which  it  pays.  (See  Chap.  XXXII, 
Issuance  of  Stock  for  Property.) 

§  203.  Financial  Provisions. 

In  all  cases  where  a  bond  is  required  of  the  treasurer, 
such  instrument  should  be  submitted  to  the  board  and  for- 
mally approved  by  it  before  the  treasurer  assumes  the  active 
duties  of  the  office.  As  the  treasurer  is  usually  agreed  upon 
before  this  first  meeting  of  the  board,  it  will  be  possible  and 
entirely  proper  for  him  to  have  the  form  of  his  bond  and  the 
name  or  names  of  his  proposed  sureties  ready  for  submis- 
sion at  the  first  convenient  interval  in  the  board  proceedings 
after  his  election.  The  form  and  sureties  of  the  bond,  if 
approved,  will  be  accepted,  and  the  instrument  after  execu- 
tion be  entrusted  to  either  the  president  or  secretary  for 
safe  keeping.  The  treasurer  will  then  at  once  enter  on 
his  duties. 

The  by-laws  should  already  have  provided  that  the  funds 
of  the  corporation  be  deposited  in  some  bank  or  trust  com- 
pany, or  one  or  more  of  these  institutions  as  may  be  neces- 
sary and  as  may  be  designated  by  the  directors,  such  funds 
to  be  drawn  out  only  by  check  signed  usually  by  two  desig- 
nated officers  of  the  corporation.  It  now  devolves  upon  the 
board  to  select  the  corporate  depositary.  Such  selection 
should  be  expressed  by  resolution  which  should  be  furnished 
the  selected  institution  at  the  time  of  opening  the  account. 
The  copy  of  the  resolution  furnished  the  bank  should  be 
certified  by  the  secretary,  and  the  names  of  the  officers 
authorized  to  sign  checks  and  the  form  of  signature  should 
also  be  certified  to  the  bank.  Often  the  banks  have  their 


FIRST    MEETING    OF    DIRECTORS.  203 

own  special  forms  for  such  resolutions  of  corporate  de- 
positors. In  such  case,  the  resolution  would  conform  to 
the  bank's  requirements. 

§  204.  Other  Business. 

Many  matters  of  lesser  importance  will  be  brought  up 
before  the  first  meeting  of  directors  depending  upon  the 
particular  conditions.  Authority  may  be  needed  to  rent  and 
furnish  suitable  offices  for  the  new  corporation.  In  some 
states  provision  must  be  made  for  a  state  agent  and  office. 
Various  statutory  requirements  must  be  fulfilled.  Certain 
certificates  and  reports  may  need  authorization.  Details  of 
the  general  business  require  consideration. 

If  the  matters  requiring  attention  cannot  be  all  properly 
considered  at  this  first  session  of  the  board,  adjournment 
should  be  taken  to  the  next  day  or  to  some  other  conven- 
ient date.  Such  adjourned  meeting  is  considered  as  merely 
part  or  a  continuation  of  the  original  meeting  and  may 
re-assemble  at  the  appointed  time  without  formality  and 
complete  its  work.  If  on  the  other  hand  the  board  adjourned 
without  date,  it  could  only  be  re-assembled — prior  to  the 
next  regular  meeting — by  the  methods  prescribed  in  the 
by-laws  for  the  calling  of  special  meetings. 

Matters  requiring  the  attention  of  the  board  are  usually 
so  numerous  in  the  first  days  of  the  corporate  existence 
that  it  is  a  wise  precaution — even  if  not  necessitated  by 
business  actually  on  hand — to  adjourn  the  first  meeting  over 
a  few  days.  Then,  if  necessary,  such  adjourned  meeting  may 
be  held.  If  not  necessary,  the  members  need  not  attend 
and  the  meeting  will  lapse,  the  effect  being  then  exactly  the 
same  as  if  the  board  had  adjourned  without  date  at  the 
first  meeting. 


CHAPTER  XXXII. 
ISSUANCE    OF    STOCK    FOR  PROPERTY. 


§  205.  General 

The  great  majority  of  modern  corporations  issue  their 
capital  stock  in  whole  or  in  part  in  payment  for  property. 
This  practice  gives  rise  to  many  questions  of  more  or  less 
complexity,  varying  with  the  circumstances  of  each  particular 
transaction. 

Financial  and  trust  institutions  are  generally  forbidden  to 
issue  their  stock  for  anything  but  cash,  hence  questions  as  to  the 
full  payment  of  their  stock  or  the  legality  of  its  issue  rarely 
arise. 

Also,  in  the  many  cases  where  corporations  are  organized 
to  take  over  prosperous  businesses,  large  estates,  patents  of 
proved  value  or  other  properties  of  substantial  worth,  diffi- 
culties are  not  likely  to  occur,  there  being  in  such  cases  little 
if  any  temptation  to  over-capitalize  the  corporations  or  over- 
value the  property  taken  in  exchange  for  stock. 

In  perhaps  the  majority  of  incorporations,  however,  the 
property  acquired  is  of  speculative  or  unascertained  value,  as 
a  mining  claim,  an  untried  invention,  a  new  process  or  a  going 
concern.  Also  such  incorporations  are  usually  under  the 
direction  of  optimistic  promoters,  who  capitalize  largely  and 
take  over  the  properties  at  valuations  so  generously  elastic  as  to 
nominally  full  pay  the  stock  issued,  no  matter  what  its  amount. 
These  are  the  cases  that  give  rise  to  litigation. 

Questions  as  to  the  validity  of  a  stock  issued,  or  of  the 
full  payment  therefor,  rarely  rise  so  long  as  the  corporation  is 
prosperous  or  even  solvent.  Under  such  conditions,  few,  if 
any,  would  have  the  right  to  bring  these  matters  up,  or,  having 
the  right,  would  care  to  do  so.  If,  however  the  corporation 

204 


ISSUANCE   OF    STOCK    FOR    PROPERTY.  205 

becomes  insolvent  and  any  doubt  exists  as  to  the  proper  pay- 
ment of  the  stock  issued,  the  question  rises  promptly,  and 
usually  the  receiver  or  some  creditor  institutes  suit  to  compel 
the  stockholders  to  pay  the  difference  between  the  real  value 
of  the  property  received  by  the  corporation  and  the  par  value 
of  the  stock  issued  therefor.  The  point  upon  which  a  suit  of 
this  kind  hinges  is  the  alleged  fraudulent  overvaluation. 

Such  a  suit  could  only  be  instituted  by  dissenting  stock- 
holders, by  creditors  of  the  corporation  or  by  its  receiver.  As 
such  transactions  are  usually  carried  through  at  the  inception 
of  the  undertaking  and  with  the  knowledge  and  consent  of 
all  existing  stockholders,  the  holders  of  this  consenting  stock 
would  be  estopped  from  legal  action,  and  if  all  the  stock  of 
the  corporation  were  included  in  such  issue,  suit  could  then 
only  be  brought  on  behalf  of  creditors.  (Blum  vs.  Whitney, 
185  N.  Y.,  232,  1906;  Insurance  Press  vs.  Montauk  Wire  Co., 
103  App.  Div.,  N.  Y.,  472,  1905.)  Generally  speaking,  these 
latter  would  have  to  be  subsequent  bona  fide  creditors  who  had 
given  credit  in  ignorance  of  the  real  conditions. 

Usually,  any  alleged  overvaluation  of  the  property  taken 
by  the  corporation  in  payment  of  its  stock  would  be  a  question 
for  a  court  of  equity  to  decide.  In  case  it  were  found  that 
the  property  had  been  fraudulently  overvalued  the  stock  issued 
against  such  property  might  be  held  as  but  partly  paid,  and  the 
holders  called  upon  for  such  additional  payments  as  would 
make  up  the  full  face  value  of  the  stock.  This  liability  would 
not  extend  to  purchasers  of  stock  if  their  purchases  were 
made  in  ignorance  of  the  conditions  of  issue,  no  matter  what 
prices  were  actually  paid  by  them  for  their  stock. 

In  the  present  consideration  of  the  issuance  of  stock  for 
property,  reference  is  made  solely  to  original  issues  at  the 
time  of  organization  of  the  corporation.  Property  may  be 
received  in  exchange  for  stock  after  organization,  but  in  such 
case  another  factor,  the  rights  of  existing  stockholders,  enters 
in,  and,  though  the  general  principles  are  the  same  in  both 
cases,  differentiates  the  transaction  from  an  original  issue. 


206  ORGANIZATION    OF    CORPORATION. 

Neither,  in  the  present  consideration,  is  any  distinction 
made  between  a  subscription  to  stock  which  is  paid  in  property 
and  a  sale  of  stock  with  payment  in  property,  the  conditions 
affecting  the  validity  of  the  stock  issue  and  the  character  of 
the  stock  when  issued  being  the  same  in  either  case. 

It  is  to  be  noted  that  promoters  will  frequently  turn  prop- 
erty in  to  the  corporation  at  figures  in  excess  of  its  real  cost, 
the  difference  representing  a  secret  profit  to  the  promoter. 
These,  and  other  cases  of  promoters'  secret  profits,  represent 
a  different  phase  of  the  subject  and  are  considered  elsewhere. 
(See  Chap.  XXXIII,  Concerning  Promoters.) 

§  206.  Present  Doctrine. 

Unless  prohibited  by  constitutional  or  legislative  enact- 
ment, the  power  of  a  corporation  to  issue  stock  for  property  is 
a  common-law  right  that  has  in  many  states  been  reaffirmed 
by  express  statutory  provision. 

In  former  days  such  issuance  of  stock  for  property  and 
any  overvaluation  of  this  latter  were  nominally  concealed  and 
decently  habilitated  by  the  passing  of  cash  or  checks.  The 
owner  of  the  desired  property  subscribed  for  a  sufficient 
amount  of  stock  and  paid  for  it  by  check  or  in  cash.  The 
check  or  cash  was  thereupon,  after  due  authorization  on  the 
part  of  the  corporation,  returned  to  the  party  from  whom  it 
was  received  in  payment  for  his  property.  The  transaction 
was  then  complete.  The  corporation  had  the  property,  the 
former  owner  the  agreed  value  in  stock,  while  the  medium  of 
exchange  had  returned  to  the  source  from  which  it  came. 

In  the  present  day  this  circuitous  method  is  rarely  adopted. 
If  the  property  to  be  taken  over  were  such  as  the  corporation 
might  legally  purchase  for  cash,  it  might  generally,  with  equal 
legality  and  propriety  be  taken  directly  for  stock.  The  follow- 
ing quotations  give  a  fair  idea  of  the  present  status  of  the  law 
on  this  subject: 

"  Even  where  a  charter,  statute  or  other  govern- 
ing instrument  by  its  terms  requires  payment  in  money, 


ISSUANCE    OF   STOCK    FOR    PROPERTY.  207 

yet  unless  the  language  is  such  as  to  import  a  prohibi- 
tion of  anything  but  money  the  courts  are  generally 
agreed  that  payment  may  be  made  in  any  kind  of 
property  or  services  which  the  corporation  may  law- 
fully purchase  in  the  prosecution  of  its  business;  pro- 
vided it  be  done  in  good  faith  and  provided  such  prop- 
erty or  services  be  conveyed  or  rendered  at  a  fair 
valuation. 

"  The  reason  is  that  the  law  does  not  require  the 
parties  to  go  through  the  vain  transaction  which  would 
be  exhibited  if  the  subscriber  should  pay  for  his  shares 
in  cash  and  if  the  corporation  should  hand  back  the 
cash  in  purchase  from  the  subscriber  of  such  property 
as  the  corporation  might  wish  to  buy  from  him;  or 
what  would  be  the  equivalent  of  such  a  transaction, 
that  there  should  be  a  mere  exchange  of  checks 
between  the  parties."  Seymour  Thompson  in  10  Cyc., 
472. 

"  If  the  property  is  taken  at  a  valuation  made  with- 
out fraud,  the  payment  is  as  effectual  and  valid  as 
though  made  in  cash  to  the  same  amount."  I  Cook 
on  Corporations,  §  18. 

"  Whether  stock  is  issued  upon  subscription  or 
sold,  the  corporation,  in  the  absence  of  express  restric- 
tions, may  receive,  or  contract  to  receive  payment 
therefor  in  property,  labor,  or  services,  provided  it 
would,  under  the  express  or  implied  powers  conferred 
upon  it  by  its  charter,  have  the  power  to  purchase  the 
property  or  incur  a  debt  for  the  labor  or  services,  and 
provided  the  transaction  is  in  good  faith,  and  no  fraud 
is  perpetrated  upon  other  stockholders  or  creditors." 
2.  Clark  &  Marshall,  Private  Corporations,  §  384a. 

From  this  it  appears  the  great  essential  in  the  issuance 
of  stock  for  property  is  that  such  property  be  taken  over 
at  a  valuation  justified  by  the  conditions  and  that  the  ex- 
change be  made  in  good  faith  and  without  fraud.  If  so 
taken  over  the  transaction  may  be  made  without  the  passing 
of  cash  and  will  not  in  most  states  of  the  Union  be  invali- 
dated for  that  cause  or  by  reason  of  subsequent  depreciation 
or  even  by  the  fact  that  the  directors  erred  in  their  valuation. 


208  ORGANIZATION    OF    CORPORATION. 

In  the  absence  of  constitutional  or  legislative  prohibi- 
tions, the  only  ground  upon  which  such  a  proceeding  could 
be  attacked,  leaving  technical  irregularities  out  of  considera- 
tion, is  the  one  point  as  to  the  good  faith  and  freedom  from 
fraud  of  the  transaction. 

If  the  consideration  was  adequate,  the  stock  issued  there- 
for is  without  qualification  full-paid  and  its  holders  are  not 
liable.  If  inadequate,  or  of  doubtful  adequacy,  the  full  pay- 
ment of  the  stock  issued  therefor  is  open  to  question,  and 
if  fraud  appears,  and  in  some  states  without  fraud,  the 
holders  of  such  stock  may  be  involved  in  a  further  liability. 

The  most  liberal  presentation  of  the  general  doctrine 
in  cases  of  inadequate  payment  of  stock  by  property,  or  what 
is  the  same  thing,  the  overvaluation  of  property  received  in 
exchange  for  stock,  is  found  in  i  Cook  on  Corporations, 
§  46,  where  it  is  stated : 

"  At  common  law  there  is  no  contract,  express  or 
implied,  to  pay  to  the  corporation  or  to  corporate 
creditors  the  par  value  of  stock  which  is  issued  for 
property.  Not  only  is  there  no  such  contract,  but  there 
is  no  implied  fraud  even  though  the  property  was  over- 
valued. If  there  is  express  fraud  the  law  provides 
ample  remedies,  but  such  a  fraud  must  be  clearly 
proven  and  is  not  implied  from  proof  that  the  property 
was  worth  less  than  the  par  value  of  the  stock. 

"  This  principle  of  law,  that  there  is  no  liability  on 
stock  issued  for  property  the  value  of  which  is  less  than 
the  par  value  of  the  stock,  seems  a  self-evident  prin- 
ciple of  law.  Moreover,  this  principle  is  based  on  busi- 
ness usage  and  is  sound  practice.  There  is  no  more 
harm  in  the  issue  of  stock  below  par  than  there  is  in 
the  issue  of  a  note  or  bond  below  par.  The  extent  to 
which  courts  have  gone  in  sustaining  such  issues 
of  stock  for  property  is  shown  by  the  fact  that  even 
constitutional  and  statutory  prohibitions  against 
watered  stock  have  been  practically  construed  away 
by  the  courts.  Moreover,  the  laws  of  trade  are  more 
powerful  than  the  laws  of  men,  and  in  business  circles 
it  has  become  customary  to  capitalize  property  at  a 


ISSUANCE    OF    STOCK    FOR   PROPERTY.  209 

reasonably  high  figure.  This  is  due  to  the  fact  that 
it  is  easier  to  sell  stock  at  less  than  par  than  at  par, 
and  also  to  the  fact  that  by  a  large  capitalization,  divi- 
dends are  kept  low  enough  to  avoid  the  cupidity  of 
possible  competitors  and  the  interference  of  legis- 
latures. To  such  an  extent  is  this  practice  carried  by 
issuing  stock  for  property  at  an  overvaluation,  that 
the  investing  public  and  persons  who  give  credit  to 
corporations  rather  expect  it,  and  they  no  longer  rely 
upon  the  nominal  capitalization  of  the  company.  Ex- 
perience has  taught  them  that  they  must  investigate 
the  real  financial  condition  of  the  company,  and  invest 
or  give  credit  upon  that  alone." 

The  acknowledged  repute  of  the  text  book  from  which 
this  extract  is  taken  gives  weight  to  what  would  otherwise 
seem  an  extreme  statement  of  the  prevailing  doctrine.  It 
excuses  and  justifies  the  overvaluation  of  property,  and, 
what  is  the  same  in  principle,  the  issuance  of  stock  for  less 
than  its  par  value  provided  the  transaction  be  characterized 
by  good  faith. 

From  the  standpoint  of  logic  and  common  sense  the 
author's  position  is  undoubtedly  correct,  but  whether  it 
entirely  accords  with  the  existing  law  is  not  so  certain. 

As  stated,  there  is  no  obligation  or  liability  under  the 
common  law  for  the  issue  of  stock  for  cash  at  less  than  par, 
nor,  as  a  necessary  consequence,  any  liability  for  the  issuance 
of  stock  for  property  no  matter  what  the  value  of  the  prop- 
erty, or  the  valuation  placed  upon  it,  or  the  amount  of  stock 
issued  therefor.  It  is  merely  a  matter  of  contract  between 
the  particular  parties,  and  if  the  corporation  does  not  value 
its  stock  at  par,  or  valuing  its  stock  at  par,  chooses  to  give 
more  than  the  value  of  the  property  it  is  taking  over,  at 
common  law  it  has  the  right  and  does  not  by  the  exercise 
of  this  right  saddle  an  indefinite  possibility  of  liability  upon 
its  stockholders. 

But  the  whole  matter  of  liability  on  stock  issued  for 
property  has  now  become  one  of  constitutional  or  statutory 


210  ORGANIZATION    OF    CORPORATION. 

creation  and  differs  with  the  varying  provisions  of  the  dif- 
ferent states.  Therefore  no  general  statement  of  the 
doctrine  can  be  made  with  safety,  and  in  each  particular  case 
before  issuing  stock  for  property  the  statutes  of  the  state 
of  incorporation  should  be  examined,  and  any  decision  of 
the  state  courts  in  construing  these  statutes  must  also  be 
taken  into  consideration. 

The  general  doctrine,  however,  as  existing  in  the  greater 
number  of  states,  seems  to  be  that  in  any  case  property  may 
be  safely  taken  for  stock  at  a  fair  valuation,  and,  beyond 
this,  that  so  long  as  the  transaction  is  in  good  faith  and 
free  from  fraud,  it  will  not  be  invalidated  because  of  over- 
valuation due  to  mistake  or  honest  error  of  judgment,  or 
made  without  intent  to  defraud. 

As  will  be  noted,  this  allows  much  latitude  in  the  estima- 
tion of  values.  In  most  cases,  more  particularly  where 
speculative  values  are  taken  over,  there  is  room  for  an 
honest  difference  of  opinion  as  to  the  real  value,  and,  as  a 
general  rule,  the  valuations  must  be  obviously  excessive, 
or  absolutely  fraudulent  before  the  transaction  will  be  dis- 
turbed. 

This  is  the  position  taken  by  the  Supreme  Court  of  the 
United  States  in  Coit  vs.  Gold  Amalgamating  Co.,  119  U. 
S.,  343  (1886). 

"  But  where  full-paid  stock  is  issued  for  property 
received  there  must  be  actual  fraud  in  the  transaction 
to  enable  creditors  of  the  corporation  to  call  the  stock- 
holders to  account.  A  gross  and  obvious  overvalua- 
tion of  property  would  be  strong  evidence  of  fraud." 

It  must  be  said,  however,  that  the  force  of  this  decision 
is  weakened  by  the  conflicting  and  harsher  opinion  of  the 
same  court  in  the  later  case  of  Camden  vs.  Stuart,  144  U.  S., 
104  (1892),  as  follows: 

"  It  is  the  settled  doctrine  of  this  court  that  the 
trust  arising  in  favor  of  creditors  by  subscriptions  to 
the  stock  of  a  corporation  cannot  be  defeated  by  a 


ISSUANCE    OF    STOCK    FOR    PROPERTY.  211 

simulated  payment  of  such  subscription,  nor  by  any 
device  short  of  an  actual  payment  in  good  faith.  And 
while  any  settlement  or  satisfaction  of  such  subscrip- 
tions may  be  good  as  between  the  corporation  and  the 
stockholders,  it  is  unavailing  against  the  claims  of  the 
creditors.  Nothing  that  was  said  in  the  recent  cases 
of  Clark  vs.  Bever,  139  U.  S.,  96;  Fogg  vs.  Blair,  139  U. 
S.,  118,  or  Hanley  vs. Stutz,  139  U.S. ,417,  was  intended 
to  overrule  or  qualify  in  any  way  the  wholesome  prin- 
ciple adopted  by  this  court  in  the  earlier  cases,  espec- 
ially as  applied  to  the  original  subscribers  to  stock." 

Certainly  under  this  decision  an  overvaluation  of  prop- 
erty even  in  good  faith  would  not  stand  as  full-payment 
of  the  stock  taken  in  exchange  therefor. 

Also  in  Scoville  vs.  Thayer,  105  U.  S.,  143  (1881),  the 
discussion  of  a  contract  between  a  corporation  and  its  stock- 
holders providing  that  stock  received  by  these  latter  should 
be  considered  full-paid,  it  is  stated : 

"  But  the  doctrine  of  this  court  is,  that  such  a  con- 
tract though  binding  on  the  company,  is  a  fraud  in 
law  on  its  creditors,  which  they  could  set  aside;  that 
when  their  rights  intervene,  and  to  satisfy  their  claims, 
the  stockholders  could  be  required  to  pay  their  stock 

in  full." 

« 

In  most  of  the  state  courts,  however,  the  more  liberal  doc- 
trine already  stated  prevails,  as  set  forth  in  the  following 
decisions : 

"In  charging  the  jury  the  judge  said  '  The  real 
question,  therefore,  is  whether  the  property  was  placed 
and  taken  at  a  higher  valuation  with  a  fraudulent  pur- 
pose, with  the  intent  of  evading  the  provisions  of  the 
statute/  ' 

((  We  are  of  opinion  that  the  court  committed  no 
error  in  the  submission  of  the  case  to  the  jury.  In 
Douglass  vs.  Ireland  (73  N.  Y.,  100)  it  was  laid  down 
as  the  law  in  this  state,  that  to  charge  a  holder  of  stock, 
issued  upon  and  for  the  purchase  of  property,  indi- 
vidually for  the  debts  of  the  company,  it  is  not  enough 
to  prove  that  the  property  has  been  purchased  and 


212  ORGANIZATION    OF    CORPORATION. 

paid  for  at  an  overvaluation  through  a  mistake  or 
error  of  judgment  on  the  part  of  the  trustee,  but  it 
must  be  shown  that  the  purchase  at  the  price  agreed 
upon  was  in  bad  faith  and  to  evade  the  statute."  Lake 
Superior  Iron  Co.  vs.  Drexel,  90  N.  Y.,  92  (1882). 

"  The  enquiry,  therefore,  in  the  court  below,  should 
have  been,  whether  the  agreement  in  question  was 
fraudulent  or  not  ;  for,  if  the  transaction  was  an  honest 
one,  the  difference  in  value  between  the  property  con- 
stituting the  consideration  of  the  sale  and  the  stock 
had  no  legal  significance.  The  charter  of  this  company 
authorizes  the  corporation  to  exchange  its  capital 
stock  for  property,  and,  under  that  condition  of  things, 
a  court  of  equity  cannot  set  aside  a  transaction  of 
that  kind  simply  on  the  ground  that  the  bargain  on 
the  side  of  the  corporation  is  a  disadvantageous  one. 
*  *  *  In  the  absence  of  deceit,  or  some  other 
corrupt  constituent,  the  bargain  between  the  parties 
cannot  be  disturbed."  Bickley  vs.  Schlag,  46  N.  J., 
Eq.,  533 


In  both  these  cases  the  crucial  point  was  as  to  whether 
there  was  fraud  in  the  valuation  of  the  properties  taken  over. 
Gross  or  obvious  overvaluation  would  be  prima  facie  evidence 
of  fraud,  but  would  not  be  final.  If  the  original  parties  could 
show  that  it  was  made  in  good  faith  and  without  intent  to 
defraud,  in  most  states  the  transaction  would  stand. 

If,  however,  this  could  not  be  shown,  or  if  the  excessive 
valuation  had  been  'kept  secret  and  debts  incurred  without 
those  extending  credit  having  full  information  as  to  the 
method  by  which  the  stock  of  the  corporation  had  beer;  full- 
paid,  the  transaction  would  not  stand  and  the  stockholders 
might  be  forced  to  pay  the  difference  between  the  real  value 
of  the  property  and  the  face  value  of  the  stock  issued  in  ex- 
change for  such  property. 

The  reluctance  of  the  courts  to  disturb  transactions  in- 
volving the  exchange  of  stock  for  property  where  the  valua- 
tions are  undoubtedly  excessive,  but  made  without  intent  to 
defraud  is  strongly  shown  in  the  following  decision  : 


ISSUANCE    OF    STOCK    FOR    PROPERTY.  213 

"  The  parties  fixing  the  valuation  were  the  only 
parties  in  interest,  and  we  know  of  no  principle  of  pub- 
lic policy  which  condemns  an  agreement  between 
parties  about  to  form  a  corporation,  because  by  the 
arrangement,  the  capital  stock  is  to  be  represented 
by  property  which  they  severally  contribute,  at  a  valua- 
tion agreed  upon  between  themselves.  If  it  had 
appeared,  that  the  organization  of  the  corporation  in 
this  way,  was  a  device  to  defraud  the  public  by  putting 
valueless  stock  on  the  market,  having  an  apparent 
basis  only,  a  different  question  would  be  presented." 
Lorillard  vs.  Clyde  et  al.,  86  N.  Y.,  388  (1881).  See 
also  Seymour  vs.  S.  F.  C.  Assn.,  144  N.  Y.,  333  (1895). 

The  foregoing  statement  of  the  law  applies  with  much 
aptness  to  the  issue  of  stock  for  property  on  the  organization 
of  the  corporation.  At  this  time  no  creditors  exist  and  the 
owners  of  the  property  and  the  stockholders  of  the  new  cor- 
poration are  the  only  parties  concerned,  and  they  have  the 
right  to  put  the  property  into  the  corporate  form  at  any  cap- 
italization they  choose.  If  all  are  fully  aware  of  the  circum- 
stances, if  none  are  making  a  concealed  profit  on  the  trans- 
action and  if  the  purposes  of  the  valuation  adopted  are  free 
from  fraud,  such  issuance  of  stock  for  property  is  proper 
and  not  to  be  thereafter  set  aside. 

If,  however,  the  organization  of  the  corporation  and  the 
valuation  placed  upon  the  property  taken  over  are  merely  part 
of  a  scheme  to  foist  doubtful  stock  upon  the  public,  or  to  de- 
fraud in  other  ways,  then  the  essential  feature  of  good  faith  is 
lacking  and  the  purchasers  of  such  stock  as  well  as  subsequent 
creditors  of  the  corporation  may  bring  those  concerned  in  the 
fraud  to  account. 

It  may  be  noted,  that  since  the  foregoing  decisions  of  the 
New  York  and  New  Jersey  courts,  the  statutes  of  both  states 
relative  to  the  issuance  of  property  for  stock  have  been 
changed  by  the  insertion  of  clauses  providing  that,  "  in  the 
absence  of  actual  fraud,  the  judgment  of  the  directors  as  to 
the  value  of  property  purchased  shall  be  conclusive."  As  the 


214  ORGANIZATION    OF    CORPORATION. 

decisions  in  both  states  had,  prior  to  these  enactments,  upheld 
such  transactions  when  not  tainted  with  fraud,  the  amended 
statutes  would  seem  merely  to  express  what  was  already  the 
law.  In  both  states  the  absence  or  presence  of  fraud  has  been 
the  deciding  point  upon  which  such  transactions  have  been 
sustained  or  condemned. 

While  the  general  doctrine  sustains  full-payment  of  stock 
by  property  so  long  as  fraud  is  absent  from  the  transaction,  in 
some  important  states  of  the  Union  the  constitutions  or 
statutes  provide  expressly  that  when  stock  is  issued  for  prop- 
erty, it  shall  be  "to  the  actual  value  thereof,"  or  "to  the 
amount  of  the  value  thereof."  The  intention  of  these  pro- 
visions is  undoubtedly  to  secure  the  full  and  actual  payment 
of  stock  issued  for  property  and  to  prevent  its  nominal  full- 
payment  by  overvaluation  of  the  properties  taken  in  exchange 
therefor. 

Even  in  these  states  the  decisions  are  of  varying  tenor. 
In  Alabama,  where  express  limitations  exist,  the  following 
decision  clearly  recognizes  the  possibility  of  an  honest  varia- 
tion of  judgment  as  to  the  value  of  property.  No  overvalua- 
tion is  allowed,  but  full-payment  of  stock  by  means  of  such 
property  is  not  questioned  so  long  as  honesty  and  good  faith 
characterize  the  transaction : 

"  The  creditors  are  entitled  to  demand  that  the 
payment  on  the  stock  shall  be  an  actual  and  bona  fide 
discharge  of  the  liability  imposed  by  the  contract  of  sub- 
scription. The  defendants  in  making  and  accepting 
payment  in  property,  were  bound  to  exercise  their 
judgment  and  discretion  fairly  and  honestly  directed 
to  secure  a  substantial  compliance  with  the  terms  of 
the  contract.  In  the  exercise  of  that  judgment  and 
discretion  they  are  entitled  to  the  benefit  of  whatever 
margin  there  may  be  for  honest  difference  of  opinion 
in  the  valuation  of  the  property  but  a  deliberate  and 
intentional  overvaluation  of  the  property  is  not  per- 
missible." Elyton  Land  Co.  vs.  Birmingham  W.  and 
R.  Co.,  92  Ala.,  407  (1891). 


ISSUANCE    OF    STOCK    FOR    PROPERTY.  215 

In  the  following  Missouri  decisions  the  law  as  laid 
down  is  enunciated  with  much  harshness.  No  allowance  is 
made  for  errors  of  judgment  or  other  human  frailty.  Pre- 
sumably, under  this  construction,  a  valuation  and  transaction 
of  entire  legality  at  the  time  of  the  corporate  organization 
might  be  vitiated  by  subsequent  developments  as  to  the  value 
of  the  property.  Just  how  this  absolute  precision  of  valuation 
demanded  is  to  be  obtained  is  not  indicated  by  the  decisions. 

"  Hence  the  enquiry  in  a  case  between  the  creditor 
and  a  stockholder,  when  property  has  been  paid  for 
in  the  capital  stock  of  a  corporation,  is  not  whether 
the  stockholder  believed  or  had  reason  to  believe,  that 
the  property  was  equal  in  value  to  the  par  value  of  the 
capital  stock,  but  whether,  in  point  of  fact,  it  was  such 
equivalent."  Van  Cleve  vs.  Berkey,  145  Mo.,  109 


"  The  general  rule  of  law  is  that  it  is  beyond  the 
power  of  a  corporation  to  issue  its  stock  at  less  than 
its  par  value,  and  that  where  it  does  so  issue  its  shares, 
the  taker  of  them  is  liable  in  a  proceeding  by  or  on 
behalf  of  creditors,  to  make  good  the  difference 
between  their  par  value  and  what  he  actually  gives 
for  them.  If  an  exception  to  this  rule  is  claimed  in 
any  particular  case,  the  party  claiming  the  exemption 
must  put  his  hand  upon  some  statute  authorizing  the 
corporation  so  to  deal  with  its  shares."  Leucke  vs. 
Tredway,  45  Mo.  App.,  507  (1891).  Seymour  D. 
Thompson,  Justice. 

The  general  position  of  this  last  decision  holding  that 
the  issuance  of  stock  at  less  than  par  is  at  variation  with  the 
principles  of  the  law  and  impossible  unless  expressly  per- 
mitted by  statute  is  in  almost  diametrical  opposition  to  the 
doctrine  enunciated  in  the  quotation  already  given  from 
Cook  on  Corporations,  and  the  two  are  impossible  to  recon- 
cile. It  must  be  said,  however,  that  Judge  Thompson  has 
always  taken  an  extreme  position  in  regard  to  the  full-pay- 
ment of  stock  and  has  been  a  vigorous  opponent  of  any 
mitigation  of  the  rule  laid  down  in  his  decision.  It  is  not 


216  ORGANIZATION    OF    CORPORATION. 

probable  that  the  rule  would  now  be  enforced  in  any  state 
with  the  severity  indicated.  It  would,  nevertheless,  be  pru- 
dent in  the  organization  of  corporations  in  the  states  where 
express  limitations  exist,  to  make  a  careful  study  of  the 
decisions  before  risking  any  excessive  valuation  of  property 
to  be  taken  over  for  stock. 

§  207.  Cases  in  Point, 

As  has  been  stated,  parties  interested  in  a  property  may 
organize  a  corporation,  capitalize  at  any  figure  they  see  fit, 
and  exchange  the  property  for  the  stock  of  the  corporation. 
As  all  concerned  are  fully  informed  as  to  the  transaction 
they  are  within  their  rights  and  there  is  no  one  in  a  position 
to  object.1  So  long  as  the  corporation  is  solvent,  litigation 
can  hardly  occur.  The  test  of  the  transaction  occurs  on  the 
insolvency  of  the  corporation,  when  creditors  not  cognizant 
of  the  circumstances  attending  its  organization  find  them- 
selves  unable  to  collect  their  claims  and  suit  is  brought  on 
their  behalf.  Then  the  whole  matter  is  gone  into  and  the 
adequacy  of  the  consideration,  the  good  faith  of  the  transfer 
and  the  other  conditions  of  the  organization  are  scrutinized. 
The  following  cases  are  in  point: 

In  Lloyd  vs.  Preston,  146  U.  S.,  630  (1892),  an  Ohio  cor- 
poration had  taken  over  property  in  payment  for  its  capital 
stock.  All  the  directors  authorizing  the  transaction  were 
relatives  or  employees  of  one  of  the  interested  parties,  and 
the  property  was  not  worth,  according  to  plaintiff's  claim, 
one-fiftieth  of  the  par  value  of  the  stock  issued  against  it. 
It  was  held  that  the  overvaluation  was  so  gross  and  obvious 
as,  in  connection  with  the  other  facts  in  the  case,  clearly 
to  establish  fraud  and  to  entitle  bona  fide  creditors  to  enforce 
payment  of  their  claims  against  the  original  subscribers  to 
the  stock  of  the  corporation. 

In  Hebbard  vs.  S.  W.  Land  &  Cattle  Co.,  55  N.  J.  Eq., 
1 8  (1896),  the  capital  stock  of  the  corporation  having  been 
issued  for  property  not  worth  five  per  cent,  of  the  par  value 
xThe  Insurance  Press  ztf.Montauk,etc.,Co.,iO3App.  Div.,  N.Y.(igos). 


ISSUANCE   OF   STOCK    FOR    PROPERTY.  217 

of  the  stock,  apparently  in  pursuance  of  a  scheme  to  secure 
the  issue  of  the  stock  full-paid  without  value  having  been 
received  therefor,  such  stock  was  held  not  to  be  full-paid  in 
the  hands  of  those  cognizant  of,  or  parties  to,  the  scheme 
and  its  execution. 

In  the  case  of  the  National  Tube  Works  vs.  Gilfillian, 
124  N.  Y.,  302  (1891),  the  company  was  organized  with  a 
capital  stock  of  $300,000,  which  was  issued  for  five  unpat- 
ented  inventions.  The  substantial  issue  being  whether  the 
obvious  overvaluation  was  an  error  of  judgment,  or  in  bad 
faith,  the  jury  found  the  stock  unpaid  and  the  verdict  was 
upheld. 

In  Douglass  vs.  Ireland,  73  N.  Y.,  100  (1878),  a  company 
was  incorporated  with  a  capital  stock  of  $300,000,  all  of 
which  was  issued  in  exchange  for  two  contracts,  upon  which 
nothing  had  then  been  paid,  one  for  the  purchase  of  a  mining 
property  and  furnace,  the  other  for  the  purchase  of  stand- 
ing timber.  The  stock  was  issued  to  one  of  the  directors, 
full-paid  and  non-assessable,  and  $100,000  par  value  was 
turned  back  to  the  company  to  be  sold  to  raise  working  cap- 
ital, the  balance  being  divided  among  the  directors.  The 
defendant  had  purchased  a  portion  of  this  treasury  stock  at 
forty  cents  on  the  dollar,  and  was  well  aware  of  the  manner 
in  which  it  had  been  issued.  The  jury  found  that  the 
contracts  turned  in  to  the  company  were  worth  on  a  liberal 
estimate  but  $65,000.  The  court  held  that  the  transaction 
was  a  fraud  and  that  the  capital  stock  of  the  company  had 
not  been  full-paid  as  provided  by  the  New  York  statutes. 
The  higher  court  affirmed  the  judgment. 

In  Brockway  vs.  Ireland,  61  How.  Pr.  N.  Y.,  372  (1880), 
on-  the  same  statement  of  facts  as  in  the  preceding  case, 
another  jury,  differing  absolutely  as  to  the  bearing  of  these 
facts,  sustained  the  transaction  and  the  stock  was  held  to  be 
full-paid,  the  two  verdicts  being  in  direct  contradiction. 

In  Lake  Superior  Iron  Co.  vs.  Drexel,  90  N.  Y.,  87 
(1882),  iron  works  at  Pittsburgh  together  with  certain 


318  ORGANIZATION    OF    CORPORATION. 

patents  were  turned  over  to  the  company  in  exchange  for 
its  entire  capitalization  of  $2,500,000.  Of  this  issue  a  certain 
proportion  was  turned  over  to  a  trustee  to  be  sold  at  the 
stipulated  price  of  $50  per  share,  and  of  the  first  $100,000 
received  from  this  sale  of  stock,  $50,000  was  to  be  paid  to 
the  vendors  of  the  property,  all  other  proceeds  going  to  the 
company.  The  arrangement  was  carried  into  effect.  In 
charging  the  jury,  the  lower  court  said,  "  The  real  question, 
therefore,  is  whether  the  property  was  placed  and  taken 
at  a  higher  valuation  with  a  fraudulent  purpose."  The  jury 
decided  that  the  transaction  was  in  good  faith  and  the 
higher  court  refused  to  disturb  the  verdict. 

§  208.  Resume  of  Doctrine. 

From  the  foregoing  general  consideration  of  the  sub- 
ject the  following  deductions  may  be  made : 

In  the  absence  of  constitutional,  statutory  or  charter 
provisions  affecting  the  issuance  of  stock  for  property,  the 
common  law  prevails,  and  under  it  stock  may  be  issued  for 
property  at  the  discretion  of  the  corporation  and  without 
danger  of  subsequent  liability  on  the  stock  so  issued.  In 
case  of  fraud,  the  perpetrators  would  be  liable  on  that 
ground  but  the  issued  stock  would  not  be  held  unpaid. 

Where  legislative  or  other  prohibitions  exist  against 
the  issuance  of  stock  except  for  cash,  stock  may  nevertheless 
be  issued  for  property  that  is  fairly  of  the  face  value  of  the 
stock  given  therefor  and  there  can  be  no  subsequent  liability 
on  stock  so  issued. 

In  a  few  states,  valuation  of  the  property  received  in 
exchange  for  stock  must  be  made  with  much  precision, 
and  any  error  of  judgment — which  might  be  shown  only 
by  subsequent  developments — may  bring  about  a  liability 
on  the  stock  so  issued  equal  to  the  difference  between  the 
actual  values  received  for  such  stock  and  its  face  value. 

These  stringent  provisions  are  found  in  but  a  few  states. 
Elsewhere  the  law  and  the  construction  of  the  law  are  as 


ISSUANCE^OF    STOCK    FOR    PROPERTY.  219 

a  rule  liberal,  and  any  honest  error  of  judgment  as  to  the 
value  of  property  taken  in  exchange  for  stock,  even  though 
it  brings  about  an  excessive  valuation  of  the  property,  will 
not  entail  a  liability  therefor  upon  the  holders  of  the  stock. 
Also  a  "  reasonable  margin  for  honest  difference  of  opinion  " 
is  allowed,  and  a  moderate  overvaluation  is  not  likely  to  be 
disturbed  if  made  without  intent  to  defraud. 

Any  obvious  and  excessive  overvaluation  will,  however, 
in  any  of  the  states  be  held  as  prima  facie  evidence  of  fraud, 
and  the  burden  of  proof  will  be  thrown  upon  the  stock- 
holders to  show  that  fraud  does  not  exist.  If  they  fail  in 
this  the  stock  will  be  held  but  partly  paid  and  the  original 
stockholders,  knowing  the  circumstances  attendant  upon  the 
issue  of  their  stock,  will  be  held  liable  for  its  full  value. 

In  all  the  states,  any  overvaluation  of  property  taken 
in  exchange  for  stock  with  the  knowledge  and  consent  of 
all  the  parties  thereto  will  be  upheld  as  between  these  parties 
and  as  between  the  corporation  and  its  stockholders. 

In  most  of  the  states  overvaluation  made  with  the  consent 
of  all  parties  interested  will  not  only  stand  as  between  them, 
but  as  to  subsequent  creditors  if  these  latter  extend  credit 
with  a  full  knowledge  of  the  method  by  which  the  stock  was 
full-paid. 

Any  definite  "  danger  line  "  in  the  valuation  or  over- 
valuation of  properties  taken  in  exchange  for  stock  is  impos- 
sible to  fix.  Even  the  very  liberal  views  expressed  in 
Cook  on  Corporations  on  this  subject  are  qualified  as 
follows : 

"  There  is  a  limit  beyond  which  the  courts  will 
not  go  in  sustaining  the  issue  of  stock  for  property 
taken  at  an  overvaluation.  If  the  property  which  is 
turned  in  is  practically  worthless,  or  is  unsubstantial 
and  shadowy  in  its  nature,  the  courts  will  hold  that 
there  has  been  no  payment  at  all,  and  that  the  stock- 
holders are  liable  on  the  stock."  i  Cook  on  Corporations, 

§46. 


220  ORGANIZATION    OF    CORPORATION. 

This  is  probably  a  correct  statement  of  the  situation 
in  the  more  liberal  states.  Property  less  than  6  per  cent, 
of  the  value  of  the  stock  issued  for  it,  and  property  not  worth 
one-fifth  of  the  stock  issued  therefor  were,  in  the  decisions 
already  quoted,  held  as  payments  in  fraud  and  set  aside. 
Where  there  is,  however,  a  really  substantial  value  to  give 
a  basis  for  the  transaction  and  to  differentiate  the  enterprise 
from  the  "  unsubstantial  and  shadowy,"  the  courts  are  slow 
to  disturb  the  arrangement  and  will  not  do  so  if  it  can 
reasonably  be  avoided. 

It  should  be  noted  that  this  liability  on  stock  nominally 
full-paid  but  so  characterized  improperly  extends  only  to 
the  original  and  such  subsequent  stockholders  as  are  cog- 
nizant of  the  transaction.  Innocent  purchasers  of  stock  for 
value,  buying  it  as  full-paid  and  knowing  nothing  of  the 
proceedings  by  which  their  stock  was  supposedly  full-paid, 
could  not  be  held,  no  matter  what  the  price  paid  by  them  for 
their  stock,  (i  Cook  on  Corporations,  §  50,  and  cases  there 
cited.) 

§  209.  Property  that  may  be  Received. 

The  corporation  has  the  same  liberty  as  to  the  character 
of  property  taken  for  stock  as  it  has  in  the  purchase  of  prop- 
erty for  cash.  It  is  essential  that  the  property  be  such  as 
the  corporation  under  its  charter  has  power  to  take.  If  the 
property  is  not  necessary  to  the  conduct  of  its  authorized 
business,  any  contract  for  its  purchase,  either  for  stock  or 
cash,  is,  unless  expressly  permitted  by  its  charter,  ultra  vires, 
and  stock  issued  therefor  would  not  be  paid-up  stock. 
(Powell  vs.  Murray,  3  App.  Div.  N.  Y.,  273;  aff'd  157  N.  Y., 
717,  1899;  Montgomery  vs.  Brush  El.  L.  Co.,  48  App.  Div., 
N.  Y.,  12;  aff'd  168  N.  Y.,  657,  1901.)  The  importance 
of  this  principle  is,  however,  much  diminished  by  the  modern 
practice  of  redundant  charters  which  permit  the  acquisition, 
either  directly  or  by  obvious  implication,  of  every  kind  of 
existing  property  which  a  corporation  may  hold. 


ISSUANCE    OF    STOCK    FOR    PROPERTY.  221 

The  property  taken  in  exchange  for  stock  is  usually  an 
existing  business,  a  mining  property,  patented  invention, 
real  estate,  lease,  copyright,  trade-mark,  license  to  use  pat- 
ents or  something  of  similar  nature.  There  is  no  doubt  but 
that  these,  the  ordinary  properties  of  commerce,  may  be 
taken.  j  4 

A  railroad  may  issue  its  stock  and  bonds  for  construction, 
material  and  right  of  way,  and  any  corporation  may  issue 
stock  for  labor  done  or  services  performed  in  pursuance 
of  a  valid  contract. 

A  corporation  may  issue  its  stock  in  payment  for  the  stock 
of  other  corporations  in  all  those  states  where  it  may  hold 
the  stock  of  other  corporations  of  similar  or  collateral 
purposes.  It  may  also  issue  its  stock  for  contracts  if  such 
contracts  have  a  substantial  value. 

Stock  may  be  issued  for  options  if  these  latter  are  really 
of  value.  A  single  option,  for  which  and  upon  which  noth- 
ing had  been  paid,  would  hardly  be  a  sufficient  consideration 
for  an  issue  of  stock.  It  would  not  seem  reasonable,  how- 
ever, to  hold  this  view  in  connection  with  an  option  such 
as  that  for  which  Carnegie  received  $1,000,000  in  the  nego- 
tiations prior  to  the  formation  of  the  Steel  Trust.  Also  a 
number  of  related  options,  whereby  a  valuable  consolidation 
could  be  effected,  would  seem  to  be  a  property  of  value  and 
a  sufficient  consideration  for  a  reasonable  stock  issue.  The 
validity  of  stock  issues  against  property  of  this  kind  has 
not,  however,  been  fully  adjudicated,  and  in  case  of  insol- 
vency it  is  probable  that  the  valuations  usually  placed  upon 
options  and  contracts  exchanged  for  stock  would  be  held 
excessive.  (See  vs.  Heppenheimer,  61  Atl.  Rep.,  842,  1905.) 

Stock  may  be  issued  in  payment  for  good-will  where 
this  latter  really  exists.  (Washburn  vs.  National  Wall 
Paper  Co.,  81  Fed.  Rep.,  17,  1897.)  I*1  tne  case  °f  Camden 
vs.  Stuart,  144  U.  S.,  104  (1892),  the  court  rejected  the  claim 
for  the  "  experience  and  good-will  "  of  the  partners,  but  the 
rejection  was  based  upon  the  facts  of  the  particular  case 


222  ORGANIZATION    OF   CORPORATION. 

and  was  not  expected  or  intended  to  establish  any  general 
doctrine.  Not  infrequently  good-will  is  one  of  the  most 
valuable  single  assets  of  a  going  concern  and  would  with 
entire  propriety  and  legality  be  recognized  to  the  full  in  any 
issue  of  stock  in  payment  for  the  business. 

§  210.  Usual  Procedure. 

The  usual  procedure  in  the  organization  of  the  large 
modern  industrial  corporations  or  trusts,  which  are  formed 
for  the  purpose  of  taking  over  property  against  the  issue 
of  all,  or  a  large  portion  of  their  stock,  is  to  utilize  so-called 
"  dummies  "  for  both  incorporators  and  the  first  directors. 
These  are  usually  young  men  connected  with  or  furnished 
by  the  parties  having  charge  of  the  incorporation.  The  only 
requisites  are  that  they  be  of  age,  capable  of  contracting, 
and  one  or  more,  as  may  be  requisite,  citizens  of  the  state 
in  which  incorporation  is  had.  These  "  dummy "  incor- 
porators pay  the  necessary  fees,  take  out  the  certificate  of 
incorporation,  and  comply  literally  and  exactly  with  the 
statutes  of  the  state  of  incorporation. 

After  allowance  of  the  charter  these  incorporators  meet, 
adopt  by-laws,  and,  if  the  directors  are  not  named  in  the 
charter,  elect  a  board  of  directors.  The  owners  of  the  prop- 
erties to  be  taken  over,  or  the  parties  controlling  them,  then 
present  a  formal  proposition  to  exchange  their  properties 
for  a  portion  or  the  whole  of  the  capital  stock  of  the  new 
corporation.  This  is  not  accepted  by  the  stockholders  of 
the  new  corporation,  but  is  formally  approved  by  them  and 
referred  to  the  board  of  directors  with  a  resolution  instruct- 
ing its  acceptance.  The  work  of  the  dummy  incorporators 
is  then  complete  unless,  as  is  usually  the  case,  these  incor- 
porators are  likewise  to  act  as  directors. 

Usually  the  directors  of  the  new  corporation  are  named 
or  chosen  from  among  the  incorporators,  are  of  the  same 
somewhat  inadequate  financial  responsibility,  and  are  of  like 
temporary  tenure.  They  usually  meet  immediately  after 


ISSUANCE    OF    STOCK    FOR    PROPERTY.  223 

the  adjournment  of  the  first  stockholders'  meeting,  elect 
officers  (who  are  usually  likewise  temporary)  and  then  take 
up  the  proposition  for  the  exchange  of  stock  for  property 
together  with  the  stockholders'  resolution  directing  its 
acceptance.  The  proposition  is  accepted  by  resolution,  and 
the  proper  officers  of  the  corporation  are  authorized  and 
instructed  to  receive  the  property  and  to  issue  the  requisite 
stock  therefor,  full-paid  and  non-assessable,  to  the  order 
of  the  vendors. 

The  shares  subscribed  for  by  the  incorporators  are 
usually  included  in  the  stock  paid  for  by  the  accepted  prop- 
erties, and  are  generally  retained  by  the  dummy  directors 
until  such  time  as  their  work  is  completed.  Sometimes  the 
dummy  incorporators  and  directors  are  allowed  to  keep 
the  one  or  more  shares  respectively  subscribed,  as  their  profit 
on  the  transaction.  More  frequently  this  stock,  or  the  sub- 
scription therefor,  is  assigned  over  to  the  vendors  and  an 
honorarium  of  from  $5  to  $20  paid  each  of  the  incor- 
porators, though  at  times  they  do  not  receive  even  this 
modest  recognition  of  their  services. 

After  the  completion  of  the  formalities  laid  out  for  them 
by  the  counsel  in  charge  of  the  incorporation,  the  original 
directors,  one  by  one,  resign,  their  places  are  filled  seriatim 
as  dictated  by  the  parties  behind  them,  and  the  real  parties 
in  interest  come  into  nominal  as  well  as  actual  control. 

The  officers  of  the  dummy  board  are  sometimes  retained 
to  carry  out  the  formal  details  of  the  issuance  of  stock  and 
the  receipt  of  the  property,  but  usually  resign  and  allow  the 
permanent  officers  of  the  company  to  complete  the  details 
of  the  transfer. 

This  method  of  organization  by  means  of  "  dummies  " 
has  been  much  criticized,  but  is  entirely  legal,  is  usually 
under  the  direct  control  and  direction  of  skilful  counsel,  and 
is  made  to  conform  to  the  exact  letter  of  the  law.  In 
Dickerman  vs.  Northern  Trust  Company,  176  U.  S.,  181 
(1900),  a  case  in  which  the  transaction  was  so  grossly  fraud- 


224  ORGANIZATION    OF    CORPORATION. 

ulent  that  the  court  would  have  seized  any  opening  to  con- 
demn the  promoters,  Justice  Brown  reluctantly  admitted 
that  there  was  no  legal  flaw  in  the  organization  by  means 
of  dummy  incorporators  and  directors.  He  said : 

"  While  the  first  board  of  directors  seem  to  have 
been  mere  tools  in  the  hands  of  the  New  York  firm 
with  no  real  interest  in  the  company,  they  appear  to 
have  conformed  to  the  letter  of  the  law,  and  until  for- 
mally dissolved  the  corporation  had  a  legal  existence." 

If  the  new  organization  is  successful,  the  method  of 
organization  is  never  questioned.  If  the  property  is  not  over- 
valued, the  matter  would  have  no  bearing  even  though  the 
company  went  into  insolvency.  If,  however,  the  property 
is  so  obviously  overvalued — as  is  often  the  case  in  the  large 
organizations — that  fraud  is  at  least  implied,  those  attacking 
the  matter  add  rhetorical  effect  by  vigorous  denunciations 
of  the  dummy  incorporators  and  directors. 

As  a  matter  of  fact,  the  real  status  of  the  matter  is  not 
effected  by  the  employment  of  a  temporary  organization 
and  dummy  agents.  Everything  has  been  decided  upon — 
intelligently,  whether  properly  or  otherwise — before  these 
dummies  are  brought  into  the  plan,  and  they  are  merely 
employed  as  a  convenient  means  to  a  clearly  designed  and 
pre-arranged  end.  The  principals  may  escape  some  unde- 
sired  publicity  as  well  as  much  inconvenience  and  loss  of 
time  by  the  employment  of  these  agents,  but  they  do  not 
escape  responsibility,  and,  in  case  of  any  wrong  doing  in 
these  preliminary  operations,  would  be  as  liable  as  if  they 
had  acted  directly.  The  whole  matter  is  purely  one  of  form, 
and  merits  but  little  of  the  attention  and  indignation  it 
occasionally  receives.  (See  §  87.) 

Promoters'  frauds  are  usually  worked  in  the  organiza- 
tion of  a  corporation  through  the  means  of  dummy  incor- 
porators and  directors.  Illogically  both  the  corporate 
system  and  the  use  of  dummy  representatives  are  denounced 
for  these  frauds  instead  of  the  men  who  use  legitimate 


ISSUANCE    OF    STOCK    FOR    PROPERTY.  225 

agencies  for  ill  ends.  (See  Hutchinson  vs.  Simpson,  92  App. 
Div.  N.  Y.,  382  (1904);  also  case  of  Dickerman  vs.  North- 
ern Trust  Co.,  176  U.  S.,  181  (1900),  above  cited,  and  See  vs. 
Heppenheimer,  61  Atl.  Rep.,  842,  1905.)  (See  Chap.  XXXIII, 
Concerning  Promoters.) 

§  211.  Donation  of  Stock  to  Treasury. 

In  the  organization  of  a  corporation  to  take  over  prop- 
erty, it  is  customary  to  return  to  the  company  for  treasury 
purposes  a  portion  of  the  stock  issued  for  the  property. 
Having  been  full-paid  by  the  issue  for  property  it  may  be 
sold  at  less  than  par,  or  be  given  as  a  bonus  with  preferred 
stock  or  bonds  without  involving  the  holders  in  liability. 
(See  Chap.  X,  Treasury  Stock.) 

Such  return  of  stock  to  the  treasury  is  legitimate.  In  a 
few  cases,  the  courts  have  instanced  the  fact  that  this  has 
been  done  as  an  evidence  that  the  property  received  for 
such  stock  was  overvalued.  This  is  obviously  not  a  correct 
construction  as,  if  the  stock  were  properly  issued  in  the 
first  place,  it  becomes  the  actual  property  of  the  holders, 
and  if  they  see  fit  to  devote  a  portion  of  it  to  the  general 
interest  and  upbuilding  of  the  business,  the  matter  is  within 
their  power  and  entirely  legitimate.  (See  i  Cook  on  Cor- 
porations §  46 ;  also  2  Clark  &  Marshall,  Private  Corpora- 
tions, §3906;  The  Insurance  Press  vs.  Montauk,  etc.  Co.,  103 
App.  Div.,  N.  Y.,  472,  1905.) 


CHAPTER  XXXIII. 
CONCERNING   PROMOTERS. 


§  212.  The  Promoter's  Function. 

A  promoter  is  one  who  actively  engages  in  the  financing 
and  organization  of  an  enterprise  under  the  corporate  form. 
The  term  is  described  by  an  English  authority  as  a  "  short  and 
convenient  way  for  designating  those  who  set  in  action  the 
machinery  by  which  the  Act  enables  them  to  create  a  cor- 
poration." Cook  briefly  classifies  the  promoter  as  a  "  person 
who  brings  about  the  incorporation  and  organization  of  a  cor- 
poration." 

Another  idea  enters  into  the  modern  everyday  business 
use  of  the  term.  The  promoter's  activity  and  interest  in  the 
affairs  of  the  enterprise  are  incited  by  the  expectation  of 
special  profits.  If  he  does  not  realize  or  expect  to  realize 
special  profits  out  of  the  undertaking  he  is  not,  in  modern 
parlance,  a  promoter,  though  filling  every  requirement  of  the 
legal  definition. 

In  the  organization  of  most  modern  corporations  the  pro- 
moter plays  an  active  and  very  important  part.  His  anticipated 
special  profits  from  these  efforts  are  usually  large  and  not 
infrequently  excessive.  His  arrangements  whereby  these 
special  profits  are  to  be  secured  have  given  rise  to  a  class  of 
cases  turning  solely  upon  the  relations  existing  between  the 
promoter,  his  associates  and  the  corporation.  The  ideal  oi 
the  law  in  regard  to  these  relations  is  high.  It  is  to  be  re- 
gretted that  the  methods  of  promoters  are  usually  on  a  much 
lower  level. 

226 


CONCERNING    PROMOTERS.  227 

§213.  Promoter's  Relation  to  Corporation. 

For  the  purposes  of  the  present  consideration  the  promoter 
is  one  who  concerns  himself  in  the  financing  and  organization 
of  a  corporation  with  a  view  of  realizing  special  profits.  In  a 
large  proportion,  if  not  the  majority  of  such  cases,  the  pro- 
moter has  brought  about  the  organization  of  the  corporation 
for  the  express  purpose  of  securing  these  special  profits.  There 
is  no  intrinsic  iniquity  or  injustice  in  so  doing.  The  only 
question  is  as  to  the  propriety  and  legality  of  his  arrangements 
for  their  collection.  Too  frequently  the  methods  of  the  pro- 
moter are  not  only  of  doubtful  moral  status,  but  directly  in 
conflict  with  the  established  law. 

The  relation  of  the  promoter  both  to  the  corporation  and 
to  those  associated  with  him  in  its  organization  is  one  of  trust. 
He  is  guiding  the  affairs  of  the  incipient  corporation  and  is 
supposed  to  be  safeguarding  its  interests  as  he  would  his  own. 

"  Their  relation  to  the  persons  who  become  cor- 
porators or  subscribers  to  stock,  and  their  relation  to 
the  proposed  corporation,  when  formed,  is  a  fiduciary 
relation,  or  a  relation  of  trust  and  confidence."  I  Clark 
&  Marshall,  Private  Corporations,  §  nob. 

This  doctrine  is  too  clearly  established  to  be  questioned. 
The  confidential  relations  of  the  promoter  being  admitted,  it 
follows  then,  that  while  he  may  with  entire  propriety  and 
legality  profit  by  his  connection  with  the  corporation,  such 
profit  must  be  made  and  taken  in  such  ways  as  are  compatible 
with  these  existing  confidential  relations. 

§  214.  Illegal  Arrangements. 

The  usual  mistake  of  the  promoter  is  in  dealing  with  the 
corporation  as  he  would  with  a  stranger.  Unreasonable  or 
even  large  profits  are  difficult  of  attainment  if  the  party  from 
whom  they  are  to  be  drawn  is  informed  as  to  the  facts,  and  for 
this  reason  the  promoter  wishing  to  sell  property  to  the  cor- 
poration usually  conceals,  or  worse  still,  misrepresents  its  real 
cost.  If  the  property  were  actually  owned  by  the  promoter 


228  ORGANIZATION    OF    CORPORATION. 

and  had  been  so  owned  before  the  organization  of  the  corpora- 
tion was  undertaken,  the  status  would  be  different.  Then, 
under  proper  conditions,  there  would  be  no  compulsion  upon 
him  to  reveal  the  cost  of  the  property  and  he  might  sell  it  to 
the  corporation  at  any  agreed  price,  and,  in  the  absence  of 
misrepresentation,  without  fear  of  legal  consequences. 

Usually,  however,  the  promoter  does  not  own  the  prop- 
erty taken  over  by  the  corporation,  but  either  holds  it  under 
option  or  is  acting  in  the  interests  of  the  real  owner,  who  pays 
him  a  percentage  of  the  price  secured,  or  allows  him  to  offer 
it  to  the  corppration  at  an  advanced  price,  protecting  the  pro- 
moter in  all  excess  over  the  real  price  to  the  owner.  When 
the  promoter  occupies  this  position,  unless  with  the  full 
knowledge  of  his  associates  and  the  corporation,  he  is  in  con- 
flict with  the  law,  for  it  has  been  laid  down  clearly  and  unmis- 
takably that  a  promoter  must  not  make  any  secret  profit  out 
of  his  corporation,  or  out  of  those  associated  with  himself  in 
the  formation  of  the  corporation.  As  stated  by  Clark  and 
Marshall,  in  conclusion  of  the  quotation  of  the  preceding 
section : 

"  And  for  this  reason  it  is  well  settled  that  they 
will  not  be  permitted  to  take  advantage  of  their 
position  in  order  to  make  a  secret  profit  out  of  their 
transactions  on  behalf  of  the  proposed  corporation  or 
of  the  corporators  or  out  of  their  dealings  with  the  cor- 
poration or  corporators." 

The  leading  case  on  this  subject  is  that  of  Erlanger  vs. 
New  Sombrero  Phosphate  Co.,  5  Ch.  Div.,  73 ;  aff'd  in  3  App. 
Cases,  1216  (1878).  This  is  an  English  case,  but  its  doctrines 
have  been  generally  followed  in  this  country.  Erlanger  and 
his  associates  formed  a .  syndicate  to  purchase  a  phosphate 
island  which  was  offered  to  them  for  £55,000.  Through  agents 
a  company  was  then  formed,  Erlanger  naming  the  five 
directors.  Of  these  two  were  at  the  time  out  of  the  country. 
Of  the  three  remaining  one  was  Erlanger's  private  agent,  one 
was  Lord  Mayor  of  London  and  the  third  was  a  Rear  Admiral 


CONCERNING    PROMOTERS.  229 

of  the  British  Navy.  These  two  latter  were  not  interested  in 
any  way  with  Erlanger  in  the  sale  of  the  island  to  the  corpo- 
ration, were  not  informed  as  to  the  circumstances  and  did  not 
make  any  inquiry,  but,  acting  with  the  Erlanger  director, 
accepted  Erlanger's  proposition  to  sell  the  island  to  the  cor- 
poration for  £80,000  in  cash  and  £30,000  in  shares.  Stock 
in  the  corporation  was  then  sold  until  some  460  shareholders 
were  interested  in  the  company.  Later  these  secured  control 
of  the  company,  and  promptly  brought  suit  against  all 
parties  concerned  in  the  sale  of  the  island  to  the  company. 
As  a  result  the  sale  was  ordered  rescinded  and  the  vendors 
were  ordered  to  return  the  price  of  the  island  to  the  com- 
pany, upon  which  the  island  was  to  be  restored.  This 
decision  was  affirmed  upon  appeal.  The  Lord  Chancellor, 
in  rendering  the  decision,  said: 

"  I  do  not  say  that  the  owner  of  property  might 
not  promote  and  form  a  joint  stock  company  and  then 
sell  his  property  to  it,  but  I  do  say  that  if  he  does  he 
is  bound  to  take  care  that  he  sells  it  through  the 
medium  of  a  board  of  directors  who  can  and  do  exer- 
cise an  independent  and  intelligent  judgment  on  the 
transaction,  and  who  are  not  left  under  the  belief  that 
the  property  belongs  not  to  the  promoters,  but  to  some 
other  person." 

The  doctrine  of  the  case  was,  first,  that  independent 
directors  should  have  been  named;  and  second,  that  the  pro- 
moters should  have  made  full  disclosure  to  these  directors  of 
all  material  facts.  In  the  decision  it  was  intimated  that  if  one 
director  personally  beyond  suspicion  had  known  the  real  facts 
as  to  the  increased  price,  it  might  have  been  sufficient  to 
validate  the  sale. 

The  doctrine  in  this  country  seems  to  be  similar.  When 
property  is  taken  by  promoters  for  the  purpose  of  sale  to 
the  corporation,  whether  by  purchase,  option  or  agreement, 
they  are  bound  to  disclose  any  private  bargain  or  secret 
profits.  The  relations  are  confidential  and  each  person  is 
bound,  as  in  partnership,  to  act  with  entire  openness  and 


230  ORGANIZATION    OF    CORPORATION. 

fairness  to  those  with  whom  he  is  associated.  The  law  as 
to  this  is  very  clear  and  has  been  passed  upon  again  and 
again.  As  stated  in  Densmore  vs.  Densmore,  54  Pa.  St., 
43  (1870): 

"  Where  persons  form  such  an  association  or  begin 
or  start  the  project  of  one,  from  that  time  they  do 
stand  in  a  confidential  relation  to  each  other  and  to 
all  others  who  may  subsequently  become  members  or 
subscribers  and  it  is  not  competent  for  any  of  them 
to  purchase  property  for  the  purpose  of  such  company 
and  then  sell  it  at  an  advance  without  a  full  disclosure 
of  the  facts." 

From  the  cases  cited  and  the  additional  cases  given 
hereafter,  it  is  clear  that  any  special  profits  made  by  the 
promoter  are  illegal  unless  made  with  the  full  knowledge  of  all 
the  others  interested  or  with  the  consent  of  an  independent 
and  fully  informed  board  of  directors,  or  with  dis- 
closure of  the  conditions  to  intending  stockholders.  Suit 
for  redress  might  be  brought  at  any  subsequent  time  by  the 
corporation,  or,  under  some  circumstances,  by  the  stock- 
holders who  have  immediately  contributed  to  the  promoter's 
improper  profits  by  the  purchase  of  stock  on  its  first  issue, 
or  of  treasury  stock  thereafter. 

It  is  to  be  noted  that  purchasers  of  stock  from  others 
than  the  corporation  do  not  have  a  right  to  any  such  redress. 
As  stated  in  Walker  vs.  Anglo-Am.  M.  &  T.  Co.,  72  Hun, 
341  (1893): 

"  A  purchaser  of  shares  in  an  existing  corporation 
from  a  stockholder,  has  no  interest  in  the  application 
of  the  money  which  he  pays  for  the  shares,  but  it  is 
quite  different  with  one  who  agrees  to  subscribe  for 
shares  in  a  corporation  to  be  created."  Also  see 
Twycross  vs.  Grant,  2  C.  P.  Div.,  483. 

These  cases  where  suit  is  brought  for  the  restoration  of 
promoters'  profits  must  not  be  confused  with  that  other  class 
in  which  recovery  is  had  by  creditors  because  of  the  over- 
valuation of  property  turned  into  the  corporation  in  ex- 


CONCERNING    PROMOTERS.  231 

change  for  stock,  or  bonds,  or  both.  The  two  cases  often  go 
together,  but  are  radically  different  in  their  nature.  An 
improper  profit  to  promoters  might  exist  without  any  over- 
valuation and  an  overvaluation  might  exist  without  any 
improper  profits  to  the  promoter.  For  instance,  property 
at  an  overvaluation  might  be  accepted  by  the  corporation 
and  its  stockholders  with  a  full  knowledge  of  the  promoters' 
profits.  They  would  then  have  no  basis  for  proceedings 
against  the  promoter.  A  creditor  might,  however,  in  such 
case  proceed  against  the  stockholders  on  the  ground  of  an 
overvaluation.  On  the  other  hand,  the  property  might  be 
put  into  the  corporation  at  a  fair  figure,  but  the  promoters 
receive  a  secret  commission,  or  rebate  or  other  improper 
profit  on  the  sale.  No  suit  for  overvaluation  would  then 
hold,  though  there  would  be  good  grounds  for  proceeding 
against  the  promoter  for  the  recovery  of  the  improperly- 
gotten  profits. 

For  further  decisions  affecting  improper  arrangements 
of  promoters,  see :  Getty  vs.  Devlin,  54  N.  Y.,  403 ;  S.  C.  70 
N.  Y.,  504  (1877);  Brewster  vs.  Hatch,  122  N.  Y.,  349 
(1890) ;  Woodbury  Heights  Land  Co.  vs.  Loudenslager,  55 
N.  J.  Eq.,  78  (1896);  Ex-Mission  Land  and  Water  Co.  vs. 
Flash,  97  Cal.,  610  (1893);  Plaquemines  Tropical  Fruit  Co. 
vs.  Buck,  52  N.  J.,  219  (1893);  and  Densmore  Oil  Co.  vs. 
Densmore,  64  Pa.  St.,  43  (1870). 

§  215.  Legitimate  Arrangements. 

The  laws  are  very  clear  in  their  denunciation  of  the  pro- 
moter's secret  profits.  They  are  hardly  less  explicit  in  their 
recognition  of  the  promoter's  right  to  profits  if  secured  and 
taken  under  proper  conditions.  In  i  Morawetz  on  Private 
Corporations,  §  293,  it  is  said : 

"  However,  there  is  no  rule  of  law  prohibiting  a 
person  from  forming  a  corporation  for  the  purpose  of 
selling  property  to  it  and  making  a  profit  from  the 
sale.  The  law  merely  requires  that  such  a  transaction 


232  ORGANIZATION    OF    CORPORATION. 

be  entirely  open  and  free  from  deception  upon  the 
company  and  upon  those  who  become  members." 

Also  in  Densmore  vs.  Densmore,  64  Pa.  St.,  43  (1870), 
already  quoted  from,  the  court  said : 

"  Any  men  or  number  of  men,  who  are  owners  of 
any  kind  of  property,  real  or  personal,  may  form  a 
partnership  or  association  with  others  and  sell  that 
property  to  the  association  at  any  price  which  may  be 
agreed  upon  between  them,  no  matter  what  it  origi- 
nally cost,  provided  there  be  no  fraudulent  misrepre- 
sentations made  by  the  vendors  to  their  associates. 
They  are  not  bound  to  disclose  the  profit  which  they 
may  realize  by  the  transaction.  They  were  in  no  sense 
agents  or  trustees  in  the  original  purchase,  and  it  fol- 
lows that  there  is  no  confidential  relation  between 
the  parties  which  affects  them  with  any  trust.  It  is 
like  any  other  case  of  vendor  and  vendee." 

Also  in  Plaquemines  Tropical  Fruit  Co.  vs.  Buck,  52  N. 
J.  Eq.,  219  (1893),  following  the  case  of  Erlanger  vs.  N.  S. 
P.  Co.,  already  quoted  from,  the  court  said : 

"  Buck  as  the  promoter  of  the  corporation  stood  in 
a  fiduciary  relation  to  the  company  as  soon  as  it  was 
organized.  As  said  promoter  it  was  open  to  him  to 
sell  property  which  he  owned  to  the  company  on  mak- 
ing full  and  fair  disclosure  of  his  interest  and  position 
with  respect  to  this  property.  Not  only  was  such 
disclosure  necessary,  but  it  was  incumbent  on  him,  as 
sole  promoter  of  the  company  formed  to  purchase  this 
special  property,  controlling  and  moulding  its  organ- 
ization, to  furnish  it  with  an  executive  or  board  of 
directors  capable  of  forming  a  competent  and  impar- 
tial judgment  as  to  the  wisdom  of  the  purchase  at  the 
price  which  was  paid." 

From  these  quotations  it  seems  very  clear  that  the  pro- 
moter is  well  within  his  rights  when  he  organizes  a  corpora- 
tion to  purchase  his  own  property,  provided  that  such  pur- 
chase by  the  corporation  is  directed  by  an  independent 
board  capable  of  impartial  judgment  as  to  the  value  of  the 


CONCERNING    PROMOTERS. 


property  and  the  advisability  of  the  purchase  by  the  cor- 
poration, and  is  made  with  full  knowledge  of  the  fact  that 
the  property  in  question  belongs  to  the  promoter.  In  such 
cases  the  promoter  having  purchased  or  otherwise  acquired 
such  property  before  the  inception  of  the  corporation,  was 
not  and  could  not  then  in  any  way  have  been  acting  as  the 
agent  or  trustee  of  the  corporation.  He  may  have  acquired 
such  property  at  any  price  or  in  any  way,  and,  when  later 
the  corporation  is  organized,  he  is  at  liberty  to  offer  this 
property  to  the  corporation  at  any  advanced,  or  different 
price  he  may  choose,  without  divulging  the  profits  to  be 
made  thereby.  The  one  essential  is  that  such  offering  shall  be 
absolutely  without  misrepresentation.  If  he  represents  that 
the  property  is  owned  by  him  when  only  held  by  option,  or 
that  it  is  turned  in  to  the  corporation  at  the  cost  to  him  when 
he  is  really  making  a  profit,  such  misrepresentations  are, 
under  the  circumstances,  material  and  render  the  promoter 
liable  for  the  secret  profits  so  secured.  Without  such  mis- 
representation, however,  he  may  make  what  profit  he  will. 

The  courts  go  even  further  than  this,  as  in  the  later 
English  case  of  Lagunas  Nitrate  Co.  vs.  Lagunas  Nitrate 
Syndicate,  2  Ch.,  392  (1899),  where  the  ground  was  taken 
that  when  a  full  disclosure  was  made  to  the  parties  who  were 
later  induced  to  join  the  company,  the  independent  and 
competent  board  of  directors  could  properly  be  dispensed 
with. 

Also  in  re  Ambrose  Lake  Tin  &  Copper  Mining  Co.,  14 
Ch.  Div.,  390  (1880),  where  a  mine  valued  at  £6,000  was 
assigned  to  a  company  by  its  promoters  for  £24,000  of  its 
stock.  Later  the  official  liquidator  brought  suit  against 
the  promoter  for  the  difference  between  the  real  value  of 
the  mine  and  the  nominal  value  of  the  stock  received  by  the 
promoters,  but,  no  stock  having  been  sold  to  outsiders  and 
the  transaction  being  altogether  between  the  parties  con- 
cerned and  there  having  been  no  concealment,  no  one  was 
wronged  and  the  Court  refused  to  hold  the  promoters.  This 


234  ORGANIZATION    OF    CORPORATION. 

decision  was  sustained  on  appeal.  No  rights  of  unpaid 
creditors  came  into  this  case. 

In  this  country  the  position  of  the  courts  is  the  same. 
In  Parsons  vs.  Hayes,  14  Abb.  N.  C,  N.  Y.,  419  (1883), 
property  \^ias  turned  in  at  a  gross  overvaluation,  but  the 
only  persons  in  interest  were  informed  of  all  details  and  did 
not  object,  therefore  the  promoters  were  held  to  be  within 
their  rights  and  the  contract  not  subject  to  rescission.  This 
case  is  discussed  in  i  Morawetz  on  Private  Corporations, 
§290. 

Also  in  Tompkins  vs.  Sperry,  Jones  &  Co.,  96  Md.,  580 
(1903),  a  receiver  attempted  to  hold  the  promoters  respon- 
sible under  the  same  circumstances  but  his  application  was 
denied  on  the  ground  that  there  was  no  concealment  and 
therefore  no  wrong.  The  New  York  case  of  Seymour  vs. 
Spring  Forest  Cemetery  Assn.,  144  N.  Y.,  333  (1895),  and 
also  Blum  vs.  Whitney,  185  N.  Y.,  232  (1906),  is  to  the  same 
effect. 

From  this  would  appear  that  if  with  the  full  knowledge 
of  all  concerned  as  to  the  circumstances  thereof,  a  corpora- 
tion is  organized  and  property  is  exchanged  for  a  portion 
or  the  whole  of  its  stock,  the  completed  transaction  has 
harmed  no  one,  is  absolutely  legal  and  is  not  open  to  later 
objection  by  any  of  the  parties  consenting  thereto.  The 
promoters  may  make  such  profits  as  they  please  and  the 
other  participating  parties  consent  to,  and  up  this  point  the 
transaction  is  legitimate  and  unobjectionable.  (The  Insur- 
ance Press  vs.  Montauk,  etc.  Co.,  103  App.  Div.,  N.  Y.,  1905.) 

Nor,  if  the  price  paid  for  the  property  taken  was  within 
reason,  or  capable  of  justification,  is  there  danger  of  any 
subsequent  objection,  no  matter  what  profit  may  have  been 
made  by  the  promoters.  Nor,  even  if  the  price  and  profits 
were  entirely  out  of  reason  and  totally  unjustifiable,  is  there 
any  danger  of  adverse  legal  action  if  creditors  and  subse- 
quent stockholders  are  informed  as  to  the  conditions  before 
they  give  credit  to  the  corporation  or  invest  in  its  securities. 


CONCERNING   PROMOTERS.  335 

If,  however,  under  such  conditions,  stock  is  sold  or  obliga- 
tions contracted  by  the  corporation  without  proper  publicity 
as  to  the  basis  of  credit  or  stock  value,  a  cause  of  action  may 
accrue  either  against  those  who  originally  transferred  the 
overvalued  property  to  the  corporation,  or  against  the 
holders  of  the  stock  which,  as  shown  by  results,  was  not 
full-paid.  This  would,  however,  be  a  matter  only  of  over- 
valuation, the  profits  received  by  promoters  being  merely  an 
incident  and  not  the  point  at  issue.  (Salomon  vs.  Salomon 
&  Co.,  App.  Cases,  22,  1897.) 

A  recent  and  typical  case  of  interest  in  this  connection 
is  that  of  Hutchinson  vs.  Simpson,  92  App.  Div.,  N.  Y.,  382 
(1904).  An  interesting  discussion  of  this  case  and  of  the 
questions  involved  is  given  in  the  dissenting  opinion  by 
Judge  Hatch. 

§  216.  Incidental  Liabilities. 

The  relations  between  associated  promoters  will  be 
determined  by  their  agreements.  In  the  absence  of  any 
agreement  to  the  contrary,  one  promoter  may  require  con- 
tributions from  his  associates  for  any  expenses  or  outlay  in- 
curred in  connection  with  their  undertaking. 

Promoters  receiving  subscriptions  for  the  stock  of  a 
corporation  to  be  organized  by  them  are  responsible  to  the 
subscribers  for  the  amounts  received  if  they  fail  to  complete 
the  organization. 

If  promoters  perform  services  and  incur  expenses  in  pro- 
curing subscriptions,  or  in  doing  things  for  the  benefit 
of  the  prospective  corporation,  the  corporation  when  organ- 
ized cannot  be  held  responsible  for  such  expenses  and  ser- 
vices unless  it  expressly  undertakes  to  assume  them.  If  it 
does  assume  them,  the  benefits  received  by  the  corporation 
from  such  acts  and  expenditures  will  be  deemed  sufficient 
consideration  to  support  such  assumption. 

Contracts  and  agreements  made  for  a  corporation  before 
its  organization  by  a  promoter  do  not  bind  it,  unless  the  cor- 


236  ORGANIZATION    OF    CORPORATION. 

poration  accepts  the  same,  either  by  express  action,  or 
impliedly,  by  taking  the  benefit  of  such  contracts  and  agree- 
ments. 

A  promoter  entering  into  a  contract  on  behalf  of  a  cor- 
poration to  be  formed,  will  be  himself  liable  on  such  contract 
unless  it  is  expressly  understood  that  the  other  party  is  to 
look  to  the  corporation  alone. 

An  agreement  by  a  promoter  with  the  vendor  of  property 
to  the  promoter's  corporation,  for  a  private  commission,  or 
the  excess  obtained  over  a  specified  price,  such  payment  or 
profit  being  unknown  to  the  corporation,  is  contrary  to 
public  policy  and  illegal  and  the  promoter  could  not  main- 
tain an  action  to  recover.  (See  §  16.) 

§  217.  Restrictions  on  Sale  of  Stock. 

It  is  often  desirable  to  restrict  the  sale  of  outstanding  stock 
for  a  limited  period,  in  order  to  permit  the  prior  sale  of 
treasury  stock  or  to  obtain  other  ends.  This  may  be  effected 
to  a  certain  extent  by  placing  such  stock  in  a  voting  trust  for 
a  specified  period.  In  this  case,  however,  the  trustees'  cer- 
tificates might  be  sold  and  interfere  with  the  purposes  of  the 
restrictions.  (See  §  226.) 

In  New  York  it  has  been  decided  that  promoters,  by  agree- 
ment, may  deposit  their  certificates  of  stock  with  a  trust  com- 
pany, not  to  be  withdrawn  therefrom  or  sold  for  a  specified 
period  unless  by  mutual  consent.  (See  Williams  vs.  Mont- 
gomery, 148  N.  Y.,  519,  1896.) 

It  has  also  been  decided  in  New  York  that  stockholders 
may  associate  themselves  and  have  their  stock  issued  to  them 
jointly,  with  an  agreement  that  such  certificates  shall  not  be 
changed,  sold  or  pledged  for  ten  years,  except  upon  consent  of 
all  interested.  (See  Hey  vs.  Dolphin,  92  Hun,  N.  Y.,  230, 
1895.)  In  this  case  the  contract  was  practically  one  of  part- 
nership in  the  stock  for  the  designated  period.  A  power  of 
attorney  given  one  of  the  partners  to  vote  upon  this  stock  was 
held  to  be  irrevocable. 


CONCERNING  PROMOTERS.  237 

All  parties  consenting,  it  would  probably  be  practicable  to 
make  a  valid  agreement,  to  which  the  corporation  would  be  a 
party,  providing  that  certificates  for  certain  stock  should  not 
be  issued  to  those  entitled  to  them,  unless  by  mutual  agreement, 
until  a  certain  specified  time,  or  until  a  stated  proportion  of 
treasury  stock  had  been  sold. 

Generally,  however,  courts  do  not  favor  agreements  sus- 
pending or  restricting  the  right  of  alienation  of  stock,  such 
agreements  being  usually  held  contrary  to  public  policy  and 
void.  (Brown  vs.  Britton,  41  App.  Div.,  N.  Y.,  57,  1899.) 


PART  VI.— SUNDRY  CONSIDERATIONS. 


CHAPTER  XXXIV. 
UNDERWRITING. 


§218.  General. 

When  any  very  large  or  important  enterprise  is  to  be 
incorporated  and  financed,  it  is  customary  to  underwrite 
the  corporate  securities  before  they  are  offered  at  public 
sale.  This  practice  has  been  particularly  characteristic  of 
the  organization  of  the  many  industrial  combinations  formed 
in  the  last  decade,  their  securities,  almost  without  exception, 
having  been  underwritten  before  the  date  of  issue. 

Underwriting  is  a  guarantee  of  the  sale  of  the  under- 
written securities  at  a  specified  minimum  price.  It  is,  in 
fact,  a  conditional  subscription  for  such  securities,  the  under- 
writers obligating  themselves  to  purchase  at  a  specified 
price  all  of  the  underwritten  securities  not  sold  at  an 
advanced  price  at  public  offering  or  otherwise,  on  or  before 
a  fixed  date,  or  within  a  certain  time  of  the  underwriting. 

The  inducement  offered  the  underwriters  for  the  re- 
sponsibility they  assume  is  usually  a  certain  portion,  or  even 
the  whole  of  the  advanced  price  at  which  it  is  expected  the 
securities  will  be  sold  to  the  public.  That  is,  if  the  price  to 
the  underwriters  on  an  issue  of  bonds  is  95  per  cent,  such 
bonds  might  be  offered  to  the  public  at  98  per  cent,  or  at 
par.  If  offered  at  par,  the  underwriters'  agreement  might 
call  for  half  this  excess  over  the  underwritten  price,  that  is, 
2%  Per  cent,  of  the  total  amount  received  on  such  sales. 
If  all  the  bonds  were  sold,  the  underwriters  would  then 
receive  $25.00  for  each  $1,000  bonds  of  the  issue,  this  amount 

238 


UNDERWRITING.  239 

being  pro  rated  among  the  underwriters  in  accordance  with 
their  subscriptions.  If  but  a  part  of  the  issue  were  sold, 
the  underwriters  would  receive  $25.00  on  each  bond  sold, 
but  would  themselves  have  to  purchase  the  unsold  bonds 
at  the  underwriters'  price  of  $950  for  each  $1,000  bond.  A 
stock  bonus 'is  frequently  given  the  underwriters  in  addition 
to  the  contemplated  cash  profits  or  in  place  thereof. 

It  is  obvious  that  the  underwriters,  if  their  obligations 
are  to  be  of  any  effect,  must  be  men  of  considerable  financial 
responsibility.  It  is  expected  that  the  securities  underwrit- 
ten will  be  sold,  but  the  underwriters  must  always  be  pre- 
pared in  case  of  failure  to  take  up  the  unsold  securities  them- 
selves. They  would  therefore  hardly  underwrite  securities 
of  doubtful  value,  and  as  the  underwriting  price  is  supposed 
to  be  a  little  below  the  real  worth,  the  possibility  of  having 
to  purchase  such  securities  is  not — if  the  underwriters  are 
financially  strong — disquieting.  If  compelled  to  purchase, 
their  money  would  be  invested  in  the  securities,  but  these 
presumably  would  be  desirable,  and  the  price  at  which  they 
were  purchased  below  what  might  reasonably  be  estimated 
as  their  value. 

If  the  public  offering  or  other  sale  of  the  underwritten 
securities  is  successful,  the  underwriters  profit  largely  with- 
out the  investment  of  a  dollar.  That  is  they  are  handsomely 
paid  for  their  guarantee,  without  having  been  called  upon  to 
do  more  than  to  be  ready  to  follow  it  up  if  the  necessity  had 
arisen.  The  operation  is  a  legitimate  one,  and  at  times 
very  advantageous  both  to  the  underwriters  and  the  cor- 
poration to  which  the  underwritten  securities  belong. 

During  the  flush  times,  but  lately  passed,  when  the 
investing  public  was  anxious  to  share  in  the  profits  of 
monopoly  and  flocked  with  enthusiasm  to  purchase  the 
highly  watered  stocks  of  the  various  industrial  combinations, 
the  underwriters  reaped  a  golden  harvest.  During  this 
period  the  underwriting  responsibilities  were  nominal.  The 
public  absorbed  everything  offered  by  the  magnates  of  the 


240  SUNDRY    CONSIDERATIONS 

financial  world,  the  underwriters'  profits  were  taken  with- 
out risk  or  responsibility  beyond  that  involved  in  the  tem- 
porary use  of  their  names  and  the  profits  were  extraordi- 
narily large.  This  period  culminated  with  the  flotation  of 
the  Steel  Trust,  in  which  the  underwriters'  profits  were  enor- 
mous. 

After  the  financing  of  the  Steel  Trust  the  underwriters 
of  the  succeeding  period  fell  upon  evil  days.  The  almost 
invariable  success  of  the  larger  underwritings  had  rendered 
usually  conservative  financiers  reckless.  They  underwrote 
beyond  their  real  financial  ability  or  in  excess  of  prudence, 
and  without  proper  investigation  of  the  underwritten  enter- 
prises, and  when  buyers  did  not  respond  to  the  public  offer- 
ings and  the  underwriters  were  called  upon  to  "  make  good  " 
the  results  were  disastrous. 

It  is  obvious  that  the  underwriting  of  any  enterprise  not 
absolutely  safe  and  well  conceived  is  beyond  the  realm  of 
sound  finance.  Reckless  underwriting  as  that  of  the  Ship- 
building Trust  is  merely  gambling  on  a  princely  scale. 

§  219.  Method. 

Common  stock,  preferred  stock  or  bonds  may  be  under- 
written, though  usually  only  the  latter  two  are  utilized  for 
the  purpose. 

The  underwriting  agreement  is  in  form  a  subscription 
to  the  stocks  or  bonds  involved,  the  body  of  the  agreement 
stating  in  detail  the  terms  and  conditions  under  which  the 
subscriptions  are  made.  The  amount  of  securities  to  be 
offered,  the  price  to  the  underwriters — or  members  of  the 
syndicate  when  the  underwriting  is  taken  by  a  syndicate — 
the  date,  price  or  terms  of  the  public  offering,  the  profits 
to  the  underwriters  and  the  terms  of  the  underwriting  sub- 
scriptions are  all  important  features  of  the  agreement.  It  is 
usually  provided  that  the  instrument  shall  not  be  effective 
until  a  fixed  sum  has  been  underwritten. 

If  certain  amounts  of  cash  are  needed  before  the  cor- 


UNDERWRITING.  241 

poration  is  in  shape  to  offer  its  securities  at  public  sale,  for 
purchase  of  plants  or  preliminary  expenses  or  other  pur- 
poses directly  pertaining  and  necessary  to  the  matter  in 
hand,  the  underwriting  agreement  may  provide  for  advances 
or  payments  on  account  by  the  underwriters,  such  amounts 
to  be  repaid  from  the  moneys  received  from  public  sub- 
scriptions. Or,  if  it  is  not  desired  to  call  upon  the  under- 
writers directly,  such  preliminary  amounts  are  secured  on 
the  credit  of  the  underwriting  from  trust  companies  or  other 
financial  institutions.  If  the  underwriters  are  of  sufficient 
financial  strength  to  make  their  underwriting  effective,  their 
subscriptions,  in  connection  with  the  obligations  and  secur- 
ities of  the  corporation  itself,  furnish  ample  security  for 
reasonable  advances. 

The  underwriters'  respective  subscriptions  mark  the  limit 
of  their  liabilities  and  responsibilities,  and,  in  event  of  profits 
ensuing,  determine  the  proportion  of  profits  each  is  to 
receive.  These  respective  subscriptions  will  specify  so  many 
shares  of  stock  or  such  a  number  of  bonds.  If  the  public 
offering  or  other  sale  should  be  a  total  failure,  the  under- 
writers will  be  called  upon  to  take  the  full  amount  of  stocks 
or  bonds  called  for  by  their  subscriptions.  If  but  a  portion 
of  the  proffered  securities  are  purchased  by  the  public,  the 
underwriters  receive  their  respective  proportions  of  the 
profits  on  the  securities  actually  sold,  and  the  balance  of 
the  underwritten  securities  are  pro-rated  among  them  in 
due  proportion. 

It  is  usual  in  underwriting  agreements  to  provide  that 
the  underwriters  shall  have  the  privilege  at  any  time  before 
the  public  offering,  or  up  to  some  specified  time  before  the 
public  offering,  of  purchasing  the  securities  underwritten 
by  them — in  whole  or  in  part — at  the  specified  underwriting 
price.  When  the  underwriting  is  a  sound  one  this  privilege 
is  frequently  exercised.  This  proceeding  terminates  the  con- 
nection of  the  individual  underwriter  with  the  agreement 
to  the  extent  of  his  purchase. 


242  SUNDRY    CONSIDERATIONS. 

The  underwritten  securities  are  usually  offered  to  the 
public  through  some  trust  company,  or  other  financial  insti- 
tution which  has  been  designated  by  the  underwriting  agree- 
ment to  act  as  trustee.  Or  when  the  underwriting  is  done 
by  a  syndicate,  this  syndicate  may  make  the  public  offering 
directly  or  through  its  own  channels.  If  offered  through  a 
trust  company,  such  company  will  apportion  the  proceeds 
in  accordance  with  the  terms  of  the  agreement.  If  offered 
by  a  syndicate,  the  apportioning  would  be  done  within  the 
syndicate,  the  corporation  merely  holding  the  syndicate  for 
the  net  price  to  be  received  by  it  for  its  securities.  In  this 
latter  case  the  underwriting  agreement  would  probably  only 
call  for  a  certain  net  price  on  the  securities  involved,  the 
syndicate  being  left  free  to  offer  the  securities  at  such  price 
— possibly  within  specified  limits — as  they  may  deem  advis- 
able, the  syndicate  bearing  all  expenses  of  the  sale  and 
retaining  as  their  profits  all  excess  secured  by  them  over 
the  net  underwriting  price.  (See  Forms  n  and  12.) 

§  220.  Advantages. 

The  advantages  of  a  substantial  underwriting  are  in  most 
cases  very  material.  The  success  of  the  flotation  is  secured 
from  the  moment  that  the  underwriting  is  completed,  and 
the  immediate  managers  of  the  undertaking  are  relieved 
from  the  necessity  of  giving  their  attention  to  this  important 
matter.  Also,  if  funds  are  needed  for  preliminary  opera- 
tions, underwriting  advances  may  usually  be  made  a  part 
of  the  contract,  or  if  this  is  not  desired,  money  may  be 
easily  raised  on  the  credit  of  the  underwriting.  The  under- 
writing is  a  guarantee  by  responsible  people  that  the  nec- 
essary money  for  the  securities  for  the  corporation  will  be 
forthcoming  at  the  time  fixed  by  the  agreement,  and  such 
a  guarantee  under  proper  conditions  may  easily  be  turned 
into  cash. 

In  addition  to  this,  the  mere  fact  that  men  of  the  repute 
and  financial  strength  necessary  for  effectual  underwriting 


UNDERWRITING.  243 

are  behind  the  enterprise,  or  are  willing  to  stand  for  it  even 
temporarily,  is  in  itself  a  very  strong  endorsement  of  the 
undertaking,  giving  it  weight  and  position,  and  materially 
assisting  in  the  public  sale  of  its  securities. 

Underwriting  is  not  ordinarily  employed  when  an  issue 
of  securities  is  to  be  floated  by  a  corporation  so  strong,  or 
an  undertaking  so  excellent  and  well  known  as  to  command 
public  confidence  and  money  on  its  merits.  Its  proper  field 
is  found  in  those  cases  where  the  enterprise  is  new,  or  in  a 
new  form,  or  is  not  properly  understood,  or  the  conditions 
are  so  unfavorable  that  no  matter  what  the  real  merits  of 
the  offering  may  be  there  is  danger  of  an  inadequate  re- 
sponse to  the  public  offering.  Under  these  circumstances, 
the  financiers,  well  knowing  the  real  strength  of  the  offering, 
or  confident  of  their  own  ability  to  place  it,  may  be  perfectly 
willing  to  assume  the  responsibility  of  such  an  underwriting, 
and  thereby  insure  the  success  of  the  issue. 

Under  any  such  conditions  the  corporation  can  very 
well  afford  the  liberal  payment  usually  accorded  under- 
writers, and  financiers  fairly  earn  their  profits,  even  if  they 
are  called  upon  to  do  nothing  more  than  loan  the  use  of  their 
names.  Even  so  strong  and  well-known  a  corporation  as 
the  Pennsylvania  Railroad  resorted  to  underwriting  in  a 
recent  issue  of  its  stock,  and,  though  the  underwriting  profits 
ran  into  the  hundreds  of  thousands  of  dollars,  the  Company's 
course  was  not  criticized  by  sound  financiers.  The  times 
were  unfavorable,  the  success  of  the  issue  was  not  abso- 
lutely assured  and  its  failure,  even  though  partial,  would 
have  been  disastrous,  involving  loss  of  prestige,  as  well  as 
failure  of  the  anticipated  funds.  The  price  paid  to  avoid 
these  possibilities — if  not  probabilities — was  a  well  justi- 
fied employment  of  the  company's  funds. 


CHAPTER  XXXV. 
VOTING    TRUSTS. 


§  221.  General. 

It  is  frequently  necessary  or  important  that  the  agreed 
management  of  a  corporation  be  preserved  consecutively  for 
a  term  of  years.  This  may  be  for  the  protection  of  minority 
or  special  interests,  or  to  maintain  a  control  satisfactory  to 
the  majority  as  then  existing,  or  in  pursuance  of  organization 
agreements,  or  in  accordance  with  the  terms  of  a  re-organ- 
ization or  consolidation.  In  any  case  the  voting  trust  is  the 
usual  means  by  which  this  is  secured.  It  is  also  called  a 
"stock  pool." 

The  voting  trust  is  an  arrangement  under  which  suffi- 
cient stock  to  insure  the  desired  ends  is  placed  in  the  hands 
of  trustees  for  some  certain  period  of  time  with  definite 
instructions  as  to  the  way  in  which  this  stock  shall  be  voted. 
Other  features  may  enter  in,  as  the  prevention  of  the  aliena- 
tion of  the  stock  held  by  these  trustees,  special  dispositions 
of  the  dividends  thereon,  etc.,  but  the  designated  exercise 
of  the  voting  power  of  the  trusteed  stock  for  the  given  period 
is  the  main  end  sought  in  the  formation  of  the  voting  trust. 
(See  Knickerbocker  Inv.  Co.  vs.  Voorhees,  100  App.  Div., 
N.  Y.,  414,  i9°S-)  (See  §§  233>  240  and  252.) 

It  is  to  be  noted  that  the  objects  to  be  attained  by  the 
voting  trust  can  often  be  secured  more  permanently  by  the 
formation  of  a  "holding  corporation."  (See  Chap.  XXXIX, 
Holding  Corporations.) 

§  222.  Distinctions. 

The  voting  trust  as  here  considered  applies  only  to  the 
stock  of  a  single  corporation  and  must  be  distinguished 

244 


VOTING    TRUSTS.  245 

from  the  voting  trust  arrangement  under  which  attempts 
were  formerly  made  to  combine  a  number  of  corporations 
under  one  management.  That  system  was  legally  unsound 
and  has  been  abandoned.  (See  Chap.  XL.)  Neither  has  a 
voting  trust  any  necessary  connection  with  restrictions  on 
the  sale  of  stock.  Provisions  restricting  the  sale  of  stock 
for  a  specified  period  or  to  anyone  not  embraced  in  the 
agreement  may  be  included  but  are  merely  incidental  to 
the  voting  restrictions  which  are  the  main  end  of  the  trust. 

§  223.  How  Formed. 

A  voting  trust  is  formed  by  placing  in  the  hands  of 
trustees  such  proportion  of  the  stock  of  the  particular  cor- 
poration as  may  be  necessary  to  secure  the  desired  control. 
These  trustees  act  under  and  their  powers  are  defined  by  an 
agreement,  styled  the  voting  trust  agreement,  subscribed 
to  by  all  the  parties  entering  the  trust.  This  agreement 
specifies  the  length  of  time  for  which  the  stock  is  to  be  held 
and  the  manner  in  which  it  is  to  be  voted  at  the  annual 
election  of  directors.  If  the  management  then  in  power 
is  to  be  retained,  the  trustees  would  be  instructed  to  cast 
the  vote  of  the  trusteed  stock  in  all  elections  of  directors 
for  the  parties  then  constituting  the  board,  suitable  pro- 
vision being  made  in  case  of  the  possible  death  of  any  of 
the  parties  named.  If  the  object  of  the  trust  were  to  insure 
minority  representation  on  the  board,  the  trustees  would 
be  instructed  to  cast  the  trustee  vote  in  favor  of  parties 
named  by  the  designated  minority  interests  up  to  such  num- 
ber of  directors  as  were  to  be  allowed  the  minority,  the 
other  members  of  the  board  being  named  by  the  majority  inter- 
ests. Or  if  the  object  of  the  trust  were  to  secure  an  efficient  and 
non-partisan  board,  the  trustees  might  be  merely  instructed 
to  cast  the  vote  of  the  stock  held  by  them  for  such  persons 
as  in  their  judgment  would  be  suitable  and  acceptable  to  the 
interests  involved.  The  trust  agreement  might  also  provide 
the  manner  in  which  the  trustees'  stock  was  to  be  voted 


246  SUNDRY    CONSIDERATIONS. 

in  matters  of  general  interest,  or  it  might  be  forbidden  to 
vote  on  these  matters,  or  its  vote  under  such  circumstances 
might  be  left  to  the  discretion  of  the  trustees. 

Whatever  the  instructions,  the  stock  must  be  voted  as  a 
unit  by  the  trustees  in  accordance  therewith,  and  in  case  of  any 
refusal  so  to  vote,  provided  the  conditions  of  the  trust  be 
proper,  the  courts  will  enforce  compliance. 

The  stock  included  in  a  voting  trust  is  actually  transferred 
to  the  trustees  and  is  by  them  taken  out  in  their  own  names. 
Trustees'  receipts  are  given  to  the  parties  depositing  stock, 
these  receipts  being  negotiable  in  form  and  representing  the 
equitable  ownership  of  the  stock  held  in  the  trust. 

The  trustees  are  authorized  to  collect  and  receive  any  divi- 
dends and  profits  accruing  on  the  stock  held  by  them,  but  must 
pay  over  the  same  in  due  proportion  to  the  equitable  owners 
of  the  trusteed  stock. 

The  trust  agreement  also  provides  the  method  of  dissolu- 
tion of  the  trust  upon  the  expiration  of  the  specified  time  limit, 
and  any  other  desired  features  or  details.  In  order  to  avoid 
any  possibly  illegal  suspension  of  the  rights  of  alienation  in 
the  stock  held  in  trust,  the  agreement  may  provide  that  at 
any  time,  by  consent  of  all  the  parties  in  interest,  the  trust  may 
be  terminated.  (Williams  vs.  Montgomery,  148  N.  Y.,  519, 
1896.) 

When  it  is  only  desired  to  control  a  single  election,  the  use 
of  proxies  is  the  most  convenient  method  by  which  this  may  be 
accomplished.  These,  being  revocable  and  of  limited  dura- 
tion, are  not  available  for  any  permanent  purposes. 

§  224.  Legal  Status. 

New  York  is  the  only  state  of  the  Union  in  which  the 
voting  trust  is  expressly  sanctioned  by  statute.  This  was  done 
in  1901,  when  an  amendment  to  the  General  Corporation  Law 
was  passed,  providing: 

"  A  stockholder  may  by  an  agreement  in  writing, 
transfer  his  stock  to  any  person  or  persons  for  the 


VOTING    TRUSTS.  247 

purpose  of  vesting  in  him,  or  them,  the  right  to  vote 
thereon  for  a  time  not  exceeding  five  years  upon 
terms  and  conditions  stated,  pursuant  to  which  such 
person  or  persons  shall  act;  every  other  stockholder, 
upon  his  request  therefor  may,  by  a  like  agreement 
in  writing,  also  transfer  his  stock  to  the  same  person 
or  persons  and  thereupon  may  participate  in  the 
terms,  conditions  and  privileges  of  such  agreement; 
the  certificates  of  stock  so  transferred  shall  be  sur- 
rendered and  cancelled  and  certificates  therefor  issued 
to  such  transferee  or  transferees  *  *  *  '  §  20, 
General  Corporation  Law. 

Under  the  statute  a  duplicate  of  the  voting  trust  agreement 
must  be  kept  on  file  in  the  principal  business  office  of  the  cor- 
poration, open  to  the  inspection  of  any  stockholder  during 
business  hours. 

Prior  to  the  passage  of  this  statute,  voting  trusts  existed 
in  New  York  and  were  regarded  favorably  by  the  courts. 
(Williams  vs.  Montgomery,  148  N.  Y.,  519,  1896.)  Since 
its  passage,  the  conditions  prescribed  by  the  statute  would 
probably  have  to  be  followed  in  detail  to  establish  an  enforce- 
able trust. 

In  New  Jersey  (Chapman  vs.  Bates,  47  All.  Rep.,  638, 
1900)  ;  Massachusetts  (Brightman  vs.  Bates,  175  Mass.,  105, 
1900) ;  California  (Whitehead  vs.  Sweet,  126  Cal.,  67, 
1899)  ;  Alabama  (Mobile,  etc.,  Co.  vs.  Nicholas,  98  Ala.,  92, 
1893),  an<3  other  states,  although  no  statutes  on  this  subject 
exist,  the  courts  have  rendered  decisions  favoring  similar 
arrangements  and  intimating  that  where  the  trust  was  for  a 
proper  purpose  and  for  a  reasonable  time,  and  did  not  contem- 
plate any  advantage  from  which  other  stockholders  of  the 
same  corporation  were  excluded,  it  was  not  contrary  to  any 
principles  of  law  or  equity.  It  is  probable  that  a  voting  trust, 
reasonable  as  to  its  duration  and  equitable  as  to  its  purposes, 
would  be  sustained  in  any  state  of  the  Union.  (See  Forms  13 
and  14.) 


248  SUNDRY    CONSIDERATIONS. 

§  225.  Requisites. 

The  primary  requisite  of  a  legally  defensible  and  enforce- 
able voting  trust  is  that  it  be  for  some  object  not  illegal  in 
itself,  or  calculated  to  injure  or  discriminate  against  other 
stockholders  of  the  same  corporation.  It  must  also  be  reason- 
able as  to  its  duration  and  terms,  and  its  possible  advantages 
should  be  open  to  all  stockholders  of  the  particular  cor- 
poration. 

Any  voting  trust  to  promote  a  monopoly,  or  to  dominate 
the  corporation  in  the  interests  of  another  corporation,  or  to 
deprive  other  stockholders  of  any  of  tkeir  rightful  powers, 
would  be  held  illegal. 

§  226.  Restriction  of  Stock  Sales. 

The  voting  trust  as  a  means  of  restricting  the  sale  of  the 
stock  held  under  its  provisions  is  of  doubtful  efficacy.  It  un- 
questionably prevents  the  transfer  of  the  actual  stock  during 
the  life  of  the  trust,  and  thereby  prevents  the  transfer  of  any 
of  the  stockholders'  rights  that  would  accompany  delivery  of 
the  stock.  On  the  other  hand,  the  trustees'  receipts,  or  certifi- 
cates, are  transferable,  and  if  the  object  of  restricting  the  sale 
is  to  maintain  the  market  price  of  the  stock,  or  to  give  prefer- 
ence to  the  sale  of  treasury  or  other  special  stock,  the  sale  of 
the  trustees'  certificates  might  interfere  with  these  purposes 
almost  as  effectually  as  would  the  sale  of  the  stock  itself. 


CHAPTER  XXXVI. 
PROTECTION   OF   MINORITY. 


§  227.  General. 

The  corporate  rights  of  minority  stockholders  are  much 
circumscribed,  are  frequently  ignored  and  are  difficult  of 
enforcement.  Usually  any  proposed  action  of  the  board 
infringing  upon  these  rights  is  not  known  to  the  minority 
until  too  late  for  prevention,  and  legal  redress  is,  as  a  rule, 
slow,  costly  and  inadequate.  The  proper  protection  of  the 
minority  is  therefore  on  occasion  a  matter  of  much  im- 
portance. 

This  protection  is  best  secured  by  due  provision  at  the 
time  of  incorporation.  It  is  unfortunate  that  the  interests 
which  control  at  this  time  are  too  often  indifferent  or  act- 
ually inimical  to  the  rights  of  the  minority  and  give  them  no 
consideration  save  as  compelled  by  statute  law,  or  by  respect 
for  the  sensibilities  of  the  investing  public. 

As  a  rule,  however,  the  parties  in  control  of  the  organ- 
ization either  voluntarily  recognize  the  rights  of  the  minor- 
ity, or  are  compelled  thereto  by  the  conditions,  and  the  min- 
ority may  then  secure  efficient  protection  for  such  rights  as 
are  properly  theirs. 

§  228.  Rights  of  Minority  at  Common  Law. 

Under  the  common  law  the  rights  of  the  minority  were 
not  extensive.  They  were  entitled  to  be  present  and  par- 
ticipate at  stockholders'  meetings.  They  were  entitled  to 
inspect  the  corporate  stock  books  during  the  usual  hours  of 
business  and  copy  the  names  therein  if  they  so  desired.  They 
also  had  the  right  under  reasonable  conditions  to  inspect  the 

240 


250  SUNDRY    CONSIDERATIONS. 

books  of  account.  Also  a  few  important  matters  such  as  the 
amendment  of  the  charter  and  the  sale  of  the  entire  cor- 
porate assets  required  authorization  by  unanimous  vote  of 
the  stockholders,  and  this  requirement  gave  the  minority 
a  certain  veto  power  in  such  matters.  At  stockholders' 
meetings  the  minority  might  assist  in  the  deliberations  but 
the  majority  had  absolute  power  to  adopt  by-laws  and  to 
elect  the  entire  board  of  directors.  The  minority  might 
not  even  have  a  representative  present  at  board  meetings 
save  by  grace  of  the  majority. 

§  229.  Encroachment  on  Minority  Rights. 

There  is  in  some  quarters  at  the  present  time  a  certain 
trend  toward  the  limitation  and  curtailing  of  the  somewhat 
slender  common  law  minority  rights. 

At  common  law  the  minority  had  the  right  at  reasonable 
times  to  inspect  the  books  and  accounts  of  the  corporation. 
This  right  has  been  so  narrowed  down  by  latter-day  statutes 
and  decisions  that  it  is,  in  many  states,  negligible.  In  New 
Jersey,  it  is  customary  to  limit  this  privilege  still  further  to 
such  inspection  as  the  directors  may  prescribe.  Even  the 
stock  and  transfer  books  may  only  be  seen  under  restric- 
tions. 

As  to  books  of  account,  this  change  of  custom  is  prob- 
ably necessary,  as  otherwise  business  competitors  might 
avail  themselves  of  the  formerly  easily  acquired  right  of 
inspection  of  the  books  to  obtain  information  and  trade 
secrets  to  the  injury  of  the  corporation.  Also  with  the  many 
stockholders  and  the  complex  accounts  of  modern  corpora- 
tions, the  right,  if  freely  exercised,  would  interfere  with  the 
regular  transaction  of  business. 

While  this  is  true,  some  substitute  for  the  stockholders' 
inspection  of  the  books  of  account  should  be  provided,  that, 
without  danger  to  the  corporation,  would  give  to  the  stock- 
holders proper  information  as  to  the  status  of  the  corporate 
business.  To  deny  it  entirely  is  a  flagrant  and  unjustifiable 


PROTECTION    OF^  MINORITY.  251 

disregard  of  the  rights  of  those  whose  property  is  at  stake. 
Also  the  abridgement  of  the  stockholders'  right  to  inspect 
the  stock  and  transfer  books  is  to  be  viewed  with  some 
distrust. 

Again,  the  right  to  make  by-laws  was  formerly  a  pre- 
rogative of  the  stockholders  alone,  and  these  by-laws  usually 
imposed  certain  proper  restraints  and  limitations  upon  the 
directors.  Now,  in  New  Jersey  and  a  few  other  states,  it  is 
possible  and  not  uncommon  by  charter  provision  to  give  the 
directors  absolute  power  to  repeal  by-laws  passed  by  the 
stockholders,  and  to  substitute,  if  they  so  desire,  by-laws 
of  their  own  of  exactly  opposite  effect.  This  is  perhaps 
the  most  dangerous  of  all  the  innovations  upon  the  old 
rules,  as  it  virtually  releases  the  directors  from  all  necessity 
for  compliance  with  the  wishes  of  the  stockholders  and 
leaves  in  their  hands  the  unrestrained  management  of  the 
affairs  of  the  corporation. 

It  will  be  understood  without  discussion  that  any  change 
in  the  law  acting  to  increase  the  powers  of  the  directors,  or 
to  remove  or  prevent  limitations  thereon,  distinctly  aug- 
ments the  power  of  the  majority.  The  board  is  elected  by 
the  majority  and  any  restraining  influences  that  exist,  out- 
side of  the  charter,  by-laws  and  statutes,  rest  with  this  major- 
ity. If  then  the  statutes  are  relaxed,  charter  limitations 
omitted  and  the  board  itself  given  the  power  to  make  and 
amend  by-laws,  the  power  of  the  board  as  the  representative 
of  the  majority  is  greatly  increased,  and  the  minority  be- 
comes in  effect  a  negligible  quantity. 

Also  the  charter  may  be  more  easily  amended  than  for- 
merly. In  New  Jersey  such  amendment  may  be  accom- 
plished by  a  two-third  vote  of  the  stockholders,  in  New  York 
by  a  three-fifth  vote,  and  in  Delaware  by  a  bare  majority  in 
interest.  This  latter  is  a  somewhat  remarkable  relaxation 
of  the  former  rule,  and  apparently  permits  a  mere  majority 
to  change  the  entire  nature  of  the  corporate  business,  as 
for  example,  to  divert  capital  invested  for  the  purpose  of 


252  SUNDRY    CONSIDERATIONS. 

starting  a  printing  business  into  the  exploitation  of  a  mining 
claim.  It  is  doubtful  whether  material  change  in  the  charter 
should  be  allowed  under  any  circumstances,  unless  by  the 
practically  unanimous  vote  of  all  concerned. 

In  consequence  of  these  tendencies  the  present  condition 
of  the  minority  stockholder,  unless  special  provision  is  made 
for  his  protection,  is  even  less  satisfactory  than  under  the 
common  law. 

§  230.  Protective  Measures. 

The  legitimate  ends  sought  by  the  minority  are  honesty, 
efficiency  and  reasonable  publicity  of  management — a  man- 
agement for  the  good  of  all  and  not  in  the  interests  of  the 
majority  alone. 

The  means  that  may  be  employed  to  secure  these  ends 
are  of  two  general  classes,  the  one  consisting  of  such 
arrangements,  modifications  or  restrictions  of  the  voting 
power  as  to  secure  to  the  minority  at  least  a  reasonable  rep- 
resentation on  the  board  of  directors;  the  other  consisting 
of  provisions  in  charter  or  by-laws  restraining  and  regulat- 
ing the  powers  of  the  board  and  prescribing  safe  rules  for 
the  conduct  of  the  business. 

The  first-mentioned  method  is  the  most  effectual  for  the 
protection  of  the  minority  interests.  The  usual  cases  of 
oppression  or  fraud  on  the  part  of  the  majority  occur  in  the 
absence  of  minority  representatives.  If  the  minority  have  one 
or  more  directors  on  the  board  the  majority  will  still,  as  a 
matter  of  course,  control,  but  it  is  in  the  highest  degree  im- 
probable that  this  control  will  be  exercised  to  the  injury  of 
minority  interests.  If  any  such  attempts  are  made,  the  minor- 
ity will  be  fully  cognizant  of  the  proposed  action,  may  enter 
such  immediate  protests  and  make  such  representations  as 
they  see  fit,  and,  if  such  prejudicial  action  is  persisted  in,  may 
take  prompt  legal  action  to  protect  their  interests. 

Without  this  board  representation,  charter  and  by-law  pro- 
visions for  the  protection  of  the  minority  are  apt  to  be  of  but 


PROTECTION    OF    MINORITY.  253 

little  effect.  With  the  assistance  of  counsel  skilled  in  evasion 
of  the  law,  such  unsupported  provisions  may  be  easily  over- 
come or  avoided.  With  an  intelligent  minority  representation 
on  the  board  such  infringements  of  minority  rights  would  not 
usually  even  be  contemplated. 

It  is  to  be  noted  that  in  any  state,  as  Delaware,  where  the 
constitution  or  statutes  prescribe  one  vote  for  each  share  of 
stock  held,  no  modification  of  the  voting  power  can  be 
effected. 

The  usual  measures  for  the  protection  of  minority  interests 
are  considered  in  the  following  sections  of  the  present 
chapter. 

§  231.  Cumulative  Voting. 

Cumulative  voting  is  one  of  the  most  effectual  means  of 
securing  minority  representation  on  the  board  of  directors. 
So  highly  are  the  results  of  this  system  esteemed  that  its  use 
in  corporate  elections  is  prescribed  by  constitutional  provisions 
in  Pennsylvania,  Illinois,  California  and  a  number  of  other 
states.  In  New  York,  New  Jersey  and  some  other  states  it 
may  be  used  if  so  provided  in  the  corporate  charter.  The 
Constitution  of  the  State  of  Pennsylvania  outlines  the  system 
with  much  conciseness,  as  follows : 

"  In  all  elections  for  directors  or  managers  of  a 
corporation,  each  member  or  shareholder  may  cast 
the  whole  number  of  his  votes  for  one  candidate  or 
distribute  them  upon  two  or  more  candidates  as  he 
may  prefer." 

The  New  York  statutes  go  into  the  matter  more  fully : 

"  The  certificate  of  incorporation  of  any  stock  com- 
pany may  provide  that  at  all  elections  of  directors  of 
such  corporation,  each  stockholder,  shall  be  entitled 
to  as  many  votes  as  shall  equal  the  number  of  his 
shares  of  stock  multiplied  by  the  number  of  directors 
to  be  elected,  and  that  he  may  cast  all  of  such  votes 
for  a  single  director  or  may  distribute  them  among 
the  number  to  be  voted  for,  or  any  two  or  more  cf 


254  SUNDRY   CONSIDERATIONS. 

them  as  he  may  see  fit,  which  right,  when  exercised, 
shall  be  termed  cumulative  voting." 

Under  this  system  the  majority  control  and  manage  the 
corporation  absolutely,  but  the  minority  will  elect  one  or  more 
directors  to  represent  them.  If  they  elect  capable  men  there 
is  but  little  danger  that  the  minority  interests  will  suffer. 

To  obtain  the  best  results  from  cumulative  voting  the 
minority  must  be  organized  to  some  extent  at  the  time  of  the 
annual  election,  and  should  delegate  by  proxy  to  some  few 
trusted  representatives  the  casting  of  their  ballots. 

To  cast  these  aggregated  votes  to  the  best  advantage  some- 
times requires  nice  calculation.  For  instance,  in  a  corporation 
with  a  board  of  five  directors  and  one  hundred  shares  of  voting 
stock,  each  share  will  have  the  right  to  cast  five  votes,  or  a 
total  for  all  the  voting  stock  of  five  hundred  votes.  In  such 
case  any  person  or  persons  controlling  seventeen  shares  would 
cast  eighty-five  votes,  and  if  this  total  vote  were  cast  for  a 
single  candidate  he  would  infallibly  be  elected.  The  aggre- 
gate of  the  other  votes  cast  would  be  four  hundred  and  fifteen, 
but  no  matter  how  they  were  divided  among  the  other  candi- 
dates, the  candidate  with  eighty-five  votes  could  not  be  de- 
feated. If  evenly  divided  among  the  five  aspirants  for  board 
membership,  each  would  receive  eighty-three  votes,  but  only 
four  of  these  five  could  be  elected,  because  the  minority  candi- 
date, with  eighty-five  votes,  would  have  a  plurality  of  the  votes 
cast. 

There  are  no  material  objections  to  the  system  of  cumula- 
tive voting,  and  it  should  be  adopted  wherever  possible.  Its 
increasing  use  is  a  practical  testimonial  to  its  value.  It  must, 
however,  be  used  with  intelligence,  or  the  results  are  some- 
times surprising.  On  occasion,  an  unsuspecting  majority  has 
so  scattered  its  votes  that  a  compact,  well-handled  minority 
has  actually  gained  control  of  the  board.  In  other  words,  the 
majority  threw  themselves  into  a  minority  by  scattering.  For 
instance,  in  the  example  given  above,  if  the  minority  controlled 
forty-five  shares  of  stock,  they  would  be  able  to  cast  two  hun- 


PROTECTION    OF    MINORITY.  255 

dred  and  twenty-five  votes  as  against  two  hundred  and  sev- 
enty-five votes  cast  by  the  majority.  The  minority  might  then 
very  safely  divide  their  votes  among  three  candidates,  with  the 
assurance  that  they  would  elect  at  least  two  directors  and 
might  elect  the  third.  The  majority  would  have  votes  enough 
to  elect  three  directors,  but,  if  they  thoughtlessly  scattered 
those  votes  among  four  or  five  candidates,  the  three  minority 
candidates,  with  over  seventy  votes  each,  would  be  elected 
and  would  control  the  board.  Such  an  election,  though 
somewhat  unexpected  in  its  results,  is  legal  and  would  be  up- 
held wherever  cumulative  voting  is  employed.  (See  §  113.) 

§  232.  Classification  of  Stock. 

Where  definite  divisions  of  interest  exist  among  the 
stockholders,  or  intending  stockholders,  at  the  beginning  of 
the  corporate  organization,  classification  of  stock  may  in  most 
states  be  employed  with  entire  confidence  that  each  class  will 
receive  due  representation  on  the  board.  Such  classification 
should  be  secured  by  charter  provision  where  possible,  else- 
where by  by-laws  adopted  before  stock  is  issued.  Such  by- 
laws so  adopted  become  in  effect  a  contract  with  those  pur- 
chasing stock  and  hence  are  not  susceptible  of  repeal  save  by 
consent  of  all  interests.  (Kent  vs.  Quicksilver  Mining  Co.,  78 
N.  Y.,  p.  178,  1879.) 

Under  such  an  arrangement  stock  may  be  divided  into  any 
classes  desired,  equal  or  unequal  in  amount.  To  each  of  these 
classes  may  be  assigned  one  or  more  directors,  and  so  long 
as  the  corporate  organization  exists  unchanged,  each  of  these 
classes  will  elect  its  own  directors  to  the  board.  This  arrange- 
ment is  very  effective.  Specific  examples  of  its  application  are 
given  in  Sections  239  and  252  of  the  present  volume.  (See 
also  §  98.) 

§  233.  Voting  Trusts. 

The  general  subject  of  voting  trusts  is  considered  else- 
where. (See  Chap.  XXXV.)  It  is  only  referred  to  here  as 


256  SUNDRY    CONSIDERATIONS. 

a  method  of  protecting  minority  rights  where  these  interests 
are  in  a  position  to  demand  such  protection  before  entering 
the  corporation.  This  may  occur  where  stock  in  a  corporation 
is  offered  for  sale,  or  where  a  partnership  is  to  be  incorporated 
with  some  of  the  partners  holding  comparatively  small 
interests. 

In  such  event,  the  proposed  investment  or  arrangements 
may  be  acceptable  to  the  parties  concerned,  even  though 
the  stock  obtained  is  in  a  hopeless  minority,  if  they  can  be 
assured  of  representation  on  the  board,  or  that  an  acceptable 
management  will  be  elected  and  retained  for  at  least  a 
reasonable  length  of  time.  In  any  such  case  the  desired  end 
may  be  effectually  secured  by  means  of  the  voting  trust. 

In  this  connection  it  may  be  noted  that  a  mere  agreement 
between  parties  holding  stock  that  such  stock  shall  be  voted 
for  certain  persons  or  in  a  prescribed  manner  will  not  be 
enforced  by  the  courts.  Under  some  circumstances  damages 
might  be  obtained  for  breach  of  such  a  contract,  but  the  con- 
tract itself  could  not  be  enforced  and  damages  would 
usually  be  very  difficult  to  prove.  (Gage  vs.  Fisher,  5  N.  D., 
297,  18950 

§  234.  Special  Arrangements. 

Many  other  arrangements  for  the  protection  of  the  min- 
ority, or  of  particular  interests  are  possible,  depending  upon 
the  circumstances,  the  statutory  provisions  of  the  state  of 
incorporation  and  the  decisions  of  its  courts. 

In  those  states  where  special  provisions  may  be  inserted 
in  the  charter,  it  is  entirely  possible  in  the  absence  of  express 
constitutional  and  statutory  prohibitions  to  decrease  the 
proportionate  vote  of  stock  as  its  holding  increases,  or  to 
deny  the  voting  right  absolutely  after  a  certain  maximum 
vote  has  been  reached.  For  instance,  it  may  be  provided 
that  each  stockholder  shall  cast  one  vote  for  each  share  of 
stock  held  by  him  up  to  a  total  of  ten  shares ;  that  on  stock 
in  excess  of  this  amount  up  to  one  hundred  shares,  he  shall 


PROTECTION    OF    MINORITY.  257 

have  one  vote  for  each  five  shares;  that  on  all  stock  in 
excess  of  one  hundred  shares  he  shall  have  one  vote  for  each 
ten  shares.  This  is  the  voting  provision  of  the  English 
Companies  Act  which  has  some  merits.  Any  other  appor- 
tionment of  the  voting  power  may  be  made,  or  it  may  be 
provided  that  after  some  maximum  vote  has  been  reached, 
as  for  instance  ten  votes  for  ten  shares  held,  no  further  vote 
shall  be  cast  by  such  stockholder  no  matter  what  his  holding. 
It  is  also  possible  to  place  the  number  of  votes  necessary 
to  elect  a  director  so  high  that  under  any  ordinary  circum- 
stances, directors  cannot  be  elected  save  by  agreement.  For 
instance  if  a  three-fourths'  vote  of  the  outstanding  voting 
stock  were  necessary  to  elect,  it  would  be  but  seldom  that 
the  majority  could  elect  without  minority  assistance.  Then 
they  must  either  allow  the  management  to  remain  without 
change,  as  will  be  the  case  if  there  is  no  election,  or  unite 
with  the  minority  to  elect.  If  this  were  necessary  they  would 
hardly  propose  anyone  objectionable  to  the  minority 
element.  This  plan  presupposes  an  existing  management 
acceptable  to  all  the  stockholders.  (See  §  236.) 

§  235.  Annual  Audits. 

In  the  larger  corporations  the  auditing  of  the  books  of 
account  is  a  very  important  feature  of  the  corporate  opera- 
tions, and,  if  properly  conducted,  may  be  made  to  eliminate 
any  necessity  for  the  inspection  of  such  books  by  the  rank 
and  file  of  the  stockholders.  Such  auditing  may  be  annual, 
quarterly,  or  held  at  irregular  intervals,  and,  if  made  by 
proper  parties,  serves  both  as  a  check  on  the  management 
and  a  verification  of  their  accounts.  The  results  of  these 
audits,  expressed  in  such  manner  as  to  prevent  the  revela- 
tion of  trade  secrets,  give  the  stockholders  the  general 
information  in  regard  to  the  business  that  they  have  a  right 
to  demand,  and,  as  has  been  stated,  thereby  remove  the 
necessity  for  examination  of  the  accounts  by  these  latter. 
It  is,  of  course,  imperative  that  the  professional  accountants 


258  SUNDRY    CONSIDERATIONS. 

employed  as  auditors  be  absolutely  reliable  and  thoroughly 
qualified  for  their  work. 

§  236.  Charter  Limitations. 

In  New  York,  New  Jersey  and  some  other  states,  limita- 
tions on  the  power  of  the  majority  may  be  inserted  in  the 
charter.  At  the  inception  of  the  enterprise,  the  minority 
are  not  infrequently  in  a  position  to  demand  the  inclusion 
of  such  limitations  as  a  condition  precedent  to  their  par- 
ticipation. Even  if  otherwise,  an  era  of  good  feeling  gen- 
erally exists  at  this  stage  of  the  enterprise  and  reasonable 
concessions  may  then  be  obtained  which  later  would  not 
be  possible. 

An  instance  is  afforded  by  the  charter  of  one  of  the 
prominent  industrial  trusts  in  which  the  following  provision 
is  found : 

"  It  is  hereby  provided  that  it  shall  require  a 
majority  of  seventy-five  per  cent,  of  the  outstanding 
voting  stock  to  amend  the  charter,  to  amend  the  by- 
laws, or  to  elect  directors  in  this  company." 

Such  a  provision  is  directly  in  the  interests  of  the  min- 
ority. In  this  case  it  may  have  been  conceded  voluntarily, 
but  probably  its  adoption  was  demanded  by  some  of  the 
smaller,  but  necessary,  component  corporations  as  one  of 
the  conditions  of  their  entrance  into  the  combination.  Under 
such  a  provision  no  changes  could  be  made  in  charter,  by- 
laws or  the  board  of  directors  against  the  wishes  of  a 
minority  controlling  twenty-six  per  cent,  of  the  voting  stock. 
Under  such  circumstances  a  minority  judiciously  handled 
could  always  protect  its  interests.  This  arrangement  can 
not  be  had  in  New  York  as  the  statute  specifies  that  directors 
shall  be  elected  "  by  a  plurality  of  the  votes  at  such  election." 
As  damage  to  minority  interests,  or  the  wrecking  of 
corporations  is  almost  invariably  caused  by  improvident 
contracts,  unwarrantable  salaries,  or  excessive  indebtedness, 
charter  limitations  upon  the  power  of  the  board  in  these 


PROTECTION    OF    MINORITY  259 

directions  are  of  frequent  occurrence.  Some  flexibility  is 
usually  given  to  these  restrictions  by  provision  that  their 
limits  may  be  exceeded  by  a  unanimous  vote  of  the  board, 
or  by  a  two-thirds'  or  three-fourths'  vote  of  the  outstanding 
voting  stock,  or  by  some  similar  provision. 

Where  these  limitations  exist,  it  is  important  that  some 
such  flexibility  be  provided,  as  otherwise  the  interests  of 
the  corporation  might  on  occasion  suffer  severely.  Being 
charter  provisions,  their  limits  could  not  be  legally  exceeded  by 
the  corporation,  either  by  action  of  the  directors  or  stock- 
holders except  as  specifically  allowed  by  the  charter,  and 
business  opportunities  of  obvious  advantage  to  the  cor- 
poration might  be  lost  for  lack  of  the  power  to  meet  their 
terms  or  conditions. 

It  is  also  possible  to  provide  in  the  charter  that  the 
minority  may  have  reasonable  access  to  the  books  and 
records  of  the  corporation,  and  any  other  desired  privileges 
not  in  conflict  with  the  statutes  may  be  so  secured.  (See 
§§  107,  116,  181  and  243.) 


CHAPTER  XXXVII. 
PROTECTING    AN    INVENTOR. 


§  237.  General. 

A  specific  case  that  comes  up  frequently  and  is  so  typical 
in  its  nature  as  to  merit  special  consideration  is  that  of  the  in- 
ventor who  desires  to  finance  or  exploit  Jiis  invention  under  the 
corporate  form,  but  fears  that  in  the  process  he  may  be  "  frozen 
out,"  or  in  some  other  way  defrauded  of  the  profits  he  should 
enjoy.  In  practice  these  fears  are  frequently  realized.  In 
some  instances  it  is  due  to  his  credulity,  avarice  or  lack  of 
business  experience,  which  leads  him  to  entertain  impossible 
propositions,  intended  only  to  defraud  the  inventor  or  delude 
the  public.  In  many  cases,  however,  it  is  caused  solely  by  the 
ignorance  of  the  inventor  as  to  how  his  interests  may  best  be 
safeguarded  and  protected. 

In  this  connection  it  may  well  be  noted  that  investors  in 
exploiting  corporations  have  quite  as  often  lost  money  through 
the  unreasonable  exactions,  the  mechanical  failures  and  the 
lack  of  business  judgment  of  inventors,  as  have  these  latter 
by  the  financial  misdeeds  of  the  former.  As  the  exploiting 
corporation  must  be  made  safe  and  attractive  to  investors  as 
well  as  to  inventors,  this  condition  has  a  direct  bearing  and 
must  be  kept  in  mind. 

It  is  usually  assumed  that  the  men  with  money  can  protect 
themselves.  This  is  generally  true,  and  if  the  corporation  as 
organized  does  not  afford  the  proper  protection  the  intelligent 
investor  will  either  keep  out,  deal  only  on  the  basis  of  a  control 
or  insist  on  a  reorganization.  If,  however,  the  corporation  has 
been  properly  organized,  with  a  view  to  the  protection  of  both 
inventor  and  investors,  these  latter  will  be  found  much  more 

260 


PROTECTING    AN    INVENTOR.  261 

reasonable  in  their  demands  and  more  willing  to  agree  to  the 
due  protection  of  the  inventor. 

Another  feature  which  often  affects  the  organization  of  ex- 
ploiting corporations  is  the  fact  that  inventors  so  frequently 
fall  into  the  hands  of  professional  promoters,  who  are  much 
more  concerned  about  promotion  profits  than  they  are  about 
the  protection  of  inventor  or  investor,  or  the  future  welfare 
of  the  undertaking.  Under  such  conditions  the  inventor's  in- 
terests are  hardly  worth  protecting.  Usually  an  enormously 
over-capitalized  corporation  appears,  a  few  confiding  investors 
are  parted  from  their  money,  this  is  quickly  absorbed  by  ex- 
perimental work  and  general  expenses,  and,  after  a  brief  and 
futile  existence,  the  corporation  disappears. 

It  may  be  said  that  an  invention,  as  a  more  or  less  specu- 
lative Undertaking  of  undetermined  value,  is,  when  incorpo- 
rated, entitled  to  a  liberal  capitalization,  but  this  should  be 
kept  within  the  bounds  of  reason.  Over-capitalization  is  dis- 
tinctly injurious  to  the  enterprise,  is  discouraging  to  intelli- 
gent investors  and  is  frequently  sufficient  in  itself  to  stifle  the 
most  hopeful  invention. 

Also,  generally  speaking,  an  unperfected  or  unpatented  in- 
vention is  not  a  proper  or  sufficient  basis  for  an  exploiting  cor- 
poration. At  this  stage  it  is  an  entirely  fit  matter  for  private 
enterprise,  but  to  incorporate  on  such  an  unsubstantial  basis 
and  offer  stock  for  general  investment  approximates  a  fraud 
upon  the  public. 

§  238.  Stock  Control. 

The  usual  procedure  in  the  organization  of  a  corporation  to 
take  over  an  invention  is  to  issue  all  the  authorized  capital 
stock  to  the  inventor,  or  to  some  trustee  acting  for  the  inter- 
ested parties,  in  payment  for  the  invention.  The  stock  is 
thereby  rendered  nominally  full-paid  and  non-assessable.  Such 
portion  of  this  stock  as  is  to  be  actually  retained  by  the  in- 
ventor and  the  other  parties  interested  with  him,  is  reserved 
for  the  purpose  and  the  balance  of  the  stock  is  turned  back  to 


262  SUNDRY    CONSIDERATIONS. 

the  corporation,  to  be  used  in  raising  capital  and  for  the  general 
purposes  of  the  company. 

If  the  inventor  is  in  a  position  to  secure  or  retain  a  majority 
of  the  voting  stock  of  the  corporation  and  can  keep  this  in  his 
own  hands  or  under  his  immediate  control,  he  has  the  most 
efficient  corporate  protection  that  is  possible.  Through  his 
power  to  elect  a  majority  of  the  directors,  he  then  has  the 
entire  management  of  the  company  and  the  enterprise  in  his 
own  hands. 

Directors  elected  under  such  circumstances  are  usually 
either  associates,  employees  or  friends  of  the  party  in  control, 
he  himself  naturally  being  included  among  the  number.  There 
is  no  way  in  which  these  directors  can  be  bound  to  carry  out 
the  wishes  of  the  party  electing  them,  and  it  therefore  behooves 
such  party  to  elect  only  directors  in  whom  he  can  repose  'the 
utmost  confidence.  If  he  does  make  a  mistake  and  one  or  more 
of  his  directors  rebel,  possibly  throwing  the  majority  of  the 
board  against  him,  he  can  usually  do  nothing  but  submit  until 
the  following  annual  election,  when  he  may  replace  the  objec- 
tionable directors  by  others  more  compliant.  A  small  board 
is  desirable  where  one  party  has  the  control,  which  he  wishes 
to  retain. 

If  the  inventor  is  able  to  keep  control  of  this  company  he 
should  need  no  other  safeguarding  of  his  interests.  If  any 
protection  is  required  it  should  be  for  the  other  parties.  It  is  but 
rarely,  however,  that  the  inventor  is  in  a  position  to  retain  con- 
trol. Money  is  needed  for  the  exploitation  of  his  invention 
and  this  the  inventor  cannot  usually  supply.  Stock  must  then 
be  sold  and  the  offering  must  be  made  attractive  to  investors. 
It  is  usually  impossible  to  do  this  and  retain  control,  and  at 
this  point  the  balance  of  power  passes  from  the  hands  of  the 
inventor.  In  this  connection  it  may  be  stated  that  there  is 
a  prejudice,  not  entirely  without  foundation,  against  inventors 
as  business  men,  and  this  fact  would  operate  against  the  sale 
of  stock  in  a  corporation  dominated  by  an  inventor. 

Where  large  individual  investments  are  made,  those  who 


PROTECTING    AN    INVENTOR.  263 

invest  expect  to  control  as  a  matter  of  course.  Where  small 
investments  can  be  secured  in  sufficient  numbers  to  make  up 
the  required  amount,  the  inventor's  position  is  better,  but  even 
here  such  inducements  must  be  offered  the  investor  and  such 
liberal  compensation  is  demanded  by  the  promoters,  that  the 
inventor  seldom  retains  the  corporate  control. 

§  239.  Classification  of  Stock. 

In  most  states  stock  may  be  classified  in  several  varia- 
tions in  protection  of  the  inventor's  interests.  If  there  is 
no  objection  to  his  active  control  of  the  corporation,  though 
the  necessities  of  the  case  compel  the  disposition  of  a  major- 
ity of  its  stock,  this  stock  may  be  divided  into  two  classes, 
the  one  being  held  by  the  inventor  and  his  associates,  the 
other  being  offered  to  the  public  or  used  in  other  ways.  To 
the  class  retained  by  the  inventor  would  be  secured  the 
election  of  the  majority  of  the  board  of  directors,  the  second 
class  electing  the  remainder.  The  inventor  would  then  elect 
a  majority  of  the  board  of  directors  and  thereby  control. 

For  instance,  if  the  corporation  were  capitalized  at 
$100,000,  of  which  the  inventor  was  to  retain  $35,000,  the 
number  of  directors  being  five,  the  stock  might  be  divided 
into  two  classes,  "  A  "  and  "  B,"  of  which  class  "  A,"  consist- 
ing of  $50,000  face  value  of  the  stock,  elects  three  members 
and  class  "  B  "  elects  two.  Then  if  the  inventor  received 
the  greater  part  of  class  "  A  "  he  would  control  this  class 
and  thereby  the  corporation. 

Or  the  stock  might  be  divided  into  five  classes,  each 
equal  as  to  amount  and  each  electing  one  director.  Each 
class  would  then  consist  of  $20,000  face  value  of  stock, 
and  the  inventor  might  easily  so  divide  his  holding  of  $35,000 
among  three  of  these  classes  that  he  would  control  each, 
thereby  electing  three  directors  and  controlling  the  board. 
$12,000  of  stock  in  each  of  two  classes  and  $11,000  in  the 
third  would  effectually  secure  this  result. 

Usually,  however,  control  by  the  inventor  is  out  of  the 


264  SUNDRY    CONSIDERATIONS. 

question,  and  the  classification  of  stock  when  employed  is 
merely  intended  to  secure  to  the  inventor — as  an  important 
minority  stockholder — due  representation  on  the  board. 
Probably  then  the  capitalization  of  $100,000  would  be  sep- 
arated in  two  classes  of  $50,000  each,  one  electing  two  and 
the  other  three  directors,  and  the  inventor's  $35,000  would 
be  allotted  him  out  of  the  first-named  class.  If  so,  he 
would  unfailingly  name  two  out  of  the  five  directors  just 
so  long  as  he  retained  control  of  his  class. 

To  secure  representation  on  the  board  is  a  very  impor- 
tant matter  in  the  protection  of  an  inventor  or  any  other 
minority  interest,  and,  by  classification  of  stock,  such  rep- 
resentation may  be  safely  and  permanently  secured. 

The  results  obtained  by  this  classification  may  be  carried 
further  if  desired,  certain  officers  being  elected  by  the  direc- 
tors of  each  class,  as  for  instance  one  class  electing  the 
president  and  secretary,  the  other  class  the  vice-president 
and  treasurer,  etc.  It  may  also  be  provided  that  no  change 
shall  be  made  in  charter  or  by-laws  except  with  the  consent 
of  a  majority  of  each  of  these  classes.  It  is,  however,  seldom 
advisable  to  carry  the  matter  to  the  extreme  indicated  even 
when  possible,  as  complications  and  friction  in  the  corporate 
machinery  are  too  apt  to  result.  (Fee  §§  98,  114,  232  and  252.) 

§  240.  Voting  Trust. 

Where  the  inventor  and  those  interested,  or  to  be  inter- 
ested with  him,  can  agree  on  a  management  acceptable  to  all, 
the  voting  trust  offers  a  suitable  and  effectual  means  of  main- 
taining such  management  for  a  term  of  years.  It  is  obvious 
that  any  desired  composition  of  the  board  may  be  maintained 
by  this  method.  Specific  parties  may  be  elected,  or  a  certain 
number  of  directors  may  be  nominated  by  the  inventor,  or 
by  the  stock  assigned  the  inventor,  while  the  remaining 
directors  are  nominated  by  other  interests,  or  left  to  the 
discretion  of  the  trust.  (See  Chap.  XXXV,  Voting  Trusts.) 


PROTECTING    AN    INVENTOR.  265 

§  241.  Cumulative  Voting. 

Where  the  inventor  merely  desires  representation  on 
the  board  of  directors,  it  may  usually  be  secured  absolutely 
by  the  adoption  of  cumulative  voting.  This  device  is  equally 
advantageous  whether  inventor  or  investor  is  in  control,  and 
is  commonly  employed.  (See  §§113  and  231.) 

§  242.  Specified  Majorities. 

The  inventor's  interests  may  be  efficiently  protected  in 
some  lines  by  means  of  charter  provisions  requiring  certain 
specific  majorities  for  important  actions  of  the  stockholders, 
as,  for  instance,  that  the  affirmative  vote  of  two-thirds  or 
three-fourths  of  the  voting  stock  shall  be  necessary  for  the 
election  of  directors  and  the  amendment  of  the  by-laws. 
Unless  prevented  by  statutory  enactments,  such  an  arrange- 
ment is  possible  in  all  those  states  where  special  charter 
provisions  are  allowed,  and,  elsewhere,  might  be  secured  by 
proper  by-law  provisions,  so  arranged  as  to  become  in  effect 
a  contract  between  the  stockholders  and  the  corporation. 

In  the  incipiency  of  the  organization  the  inventor  should 
be  able  to  secure  any  reasonable  provisions  of  this  kind  that 
may  seem  to  him  desirable.  It  is  also  to  be  noted  that  the 
board  elected  at  this  time  is  usually  selected  by  agreement 
and  is  acceptable  to  the  inventor.  The  majorities  required 
by  the  special  provisions  for  the  designated  actions  should 
be  large  enough  to  necessitate  the  concurrence  of  the  inven- 
tor's stock  before  they  can  be  secured.  Then  under  these 
special  provisions,  neither  charter  nor  by-laws  may  be 
amended,  nor  new  directors  elected  save  with  the  assent 
of  the  inventor  and  he  need  not  assent  to  any  change,  or  to 
any  election  of  new  directors,  unless  such  change,  or  such 
new  directors  are  entirely  acceptable  to  him.  It  is  within 
his  power  to  maintain  the  status  quo  until  he  is  satisfied  that 
his  interests  will  be  benefited,  or  at  least,  not  injured  by  a 
change. 


266  SUNDRY    CONSIDERATIONS. 

§  243.  Limitation  of  Expenditures. 

Corporations  are  usually  wrecked,  when  such  disaster 
occurs,  by  unwise  or  unwarranted  expenditures.  If  then 
the  power  of  the  board  to  expend  is  so  restricted  by  suitable 
charter  or  other  provisions  as  to  prevent  this  danger  a  con- 
siderable measure  of  protection  is  afforded.  This  is  espe- 
cially true  in  the  case  of  an  inventor  holding  a  minority 
interest.  If  the  board  can  neither  increase  salaries,  nor 
make  any  expenditures  above  a  certain  sum,  nor  incur 
indebtedness  in  excess  of  a  specified  amount,  except  by  such 
a  majority  as  necessitates  the  inventor's  concurrence,  the 
wrecking  of  the  corporation  by  intent  would  be  difficult  if 
not  impossible.  Circumstances  must  decide  when  such  a 
measure  is  advisable.  If  the  board  is  restricted  too  severely, 
such  conditions  may  re-act  and  injure  the  business  of  the 
corporation.  Such  restrictions  are  not  usually  needed  when 
a  suitable  board  is  in  control.  (See  §§  107,  116,  181  and 

236.) 

§  244.  Assignment  of  Patent  to  Trustee. 

Under  some  circumstances  the  inventor  may  advan- 
tageously assign  his  patents  to  a  trustee  to  hold  for  a  term  of 
years,  giving  rights  to  the  corporation  to  manufacture  there- 
under in  the  meantime,  with  the  condition  that,  at  the  expira- 
tion of  that  period,  the  patents  shall  be  assigned  the  corpora- 
tion in  case  it  has  a  certain  paid-in  capital,  is  not  in  debt,  has 
paid  certain  dividends,  or  has  accomplished  some  other  specified 
results,  otherwise,  the  trustee  to  reassign  to  the  inventor. 

This  plan  may  be  so  modified  to  meet  the  varying  condi- 
tions as  to  be  a  perfect  protection  of  the  inventor's  interests. 
It  is,  however,  usually  objectionable,  inasmuch  as  it  leaves  the 
corporation,  in  the  absence  of  other  assets,  with  only  a  condi- 
tional right  to  the  patent,  and,  therefore,  in  no  condition  to  sell 
its  stock  or  to  obtain  credit.  No  one  would  wish  to  invest 
money  in  or  extend  credit  to  a  corporation  which  may  have 


PROTECTING   AN    INVENTOR.  267 

valuable  patents  if  it  complies  with  certain  conditions,  but 
otherwise  will  have  nothing.  For  this  reason  the  plan  is  sel- 
dom practicable. 

§  245.  Reservation  of  Royalties. 

Probably  the  safest  arrangement  for  the  inventor  is  the 
reservation  of  a  royalty,  with  a  prescribed  minimum  annual 
production  or  utilization.  When  the  patent  rights  are  assigned 
with  this  condition  incorporated  in  the  assignment  and  this 
assignment  is  properly  recorded  with  the  Commissioner  of 
Patents,  the  royalty  follows  the  patent,  and,  no  matter  who 
holds  the  rights,  such  holder  must  pay  the  specified  royalties 
and  be  governed  by  the  general  conditions  of  the  assignment. 

It  is,  of  course,  always  possible  under  this  arrangement 
that  the  corporation,  or  its  assigns  or  successors,  may,  in  the 
interests  of  competitors,  merely  operate  to  the  annual  minimum 
required  by  the  assignment  and  go  no  further.  This  danger 
is,  however,  remote  and  the  annual  minimum  may  usually  be 
fixed  at  such  an  amount  as  to  practically  secure  the  inventor 
against  any  such  possibility,  or  render  its  occurrence  a  matter 
of  minor  importance.  The  minimum  might  be  made  to  in- 
crease from  year  to  year  at  a  specified  ratio. 

Under  this  arrangement  the  inventor  cannot  interfere  with 
the  management  so  long  as  his  royalties  are  paid,  and  on  the 
other  hand,  it  is  not  possible  for  other  interests  to  secure  the 
patent  without  the  royalty  obligation  to  the  inventor.  This 
latter  should,  as  a  matter  of  course,  have  some  contract  pro- 
vision for  the  examination  of  the  records  that  will  show  what 
the  utilization  of  his  patent  really  is,  and  the  date  and  manner 
of  payment  of  royalties  should  be  clearly  specified.  The 
penalty  to  ensue  if  royalties  are  not  paid  should  also  be 
specifically  provided.  It  may  be  arranged  that  in  such  case 
the  control  of  the  business  shall  pass  to  the  inventor,  or  that 
the  patents  revert  to  him.  In  the  absence  of  any  specific 
arrangement,  he  will  have  the  somewhat  inadequate  remedy  of 
a  suit  for  damages. 


CHAPTER  XXXVIII. 
INCORPORATING   A   PARTNERSHIP. 


§  246.  General. 

The  incorporation  of  partnerships  involves  problems  dif- 
fering from  those  of  the  incorporation  of  a  new  enterprise. 
These  problems  vary  with  the  conditions  and  requirements  of 
the  particular  partnership. 

If  the  partners  are  willing  to  adopt  the  simplest  and  most 
obvious  corporate  arrangements;  if  they  will  capitalize  at  the 
actual  values;  issue  all  the  capital  stock  in  payment  for  the 
values  transferred  to  the  corporation;  allot  this  full-paid  stock 
to  the  various  partners  in  the  proportion  of  their  partnership 
interests,  and  thereafter  let  matters  take  their  natural  corporate 
course,  the  duties  of  the  incorporating  counsel  are  not  onerous. 
Usually,  however,  the  parties  to  such  an  incorporation  are 
not  willing  to  commit  themselves  so  irrevocably  to  the  opera- 
tions of  the  unmodified  corporate  system.  They  are  accustomed 
to  the  conditions  of  the  partnership,  and  they  wish  these  ap- 
proximated as  nearly  as  may  be  under  the  new  regime.  Possi- 
bly all  the  partners,  without  regard  to  investment,  may  be 
participating  equally  in  the  management,  or  one  partner,  with 
a  relatively  small  investment,  may  be  the  leading  spirit  and 
practically  in  control,  or  a  silent  partner,  taking  no  active  part 
in  the  management,  may  have  a  preponderant  investment.  In 
any  of  these  cases,  the  ordinary  operations  of  the  corporate 
system  would  work  a  radical  change,  and  it  is  not  to  be  sup- 
posed that  the  partners  would  agree  to  the  entire  abolition  of 
the  conditions  under  which  they  have  achieved  success.  On 
the  contrary,  the  existing  conditions  must  be  continued.  This 
may  be  done  with  much  precision,  for  nowhere  does  the  flexi- 

268 


INCORPORATING    A    PARTNERSHIP.  269 

bility  of  the  corporate  system  appear  to  better  advantage  than 
in  its  ready  adjustment  to  the  varying  needs  of  partnership 
incorporations. 

§  247.  Name. 

The  partnership  name  should  in  itself  represent  a  consider- 
able trade  value  that  would  be  lost  if  it  were  dropped  on  in- 
corporation. To  avoid  this,  the  name  of  the  partnership  is 
usually  adopted,  as  nearly  as  may  be,  as  the  name  of  the  new 
corporation.  In  those  states  where  permitted  the  partnership 
name  is  not  infrequently  taken  without  modification  as  the 
corporate  designation.  This  practice  is,  however,  open  to  ob- 
jection, as  there  is  then  nothing  in  the  corporate  name  to  indi- 
cate that  the  concern  is  a  corporation,  and  parties  doing  busi- 
ness with  it  might,  unless  informed  of  its  corporate  nature,  be 
able  to  hold  the  stockholders  as  partners. 

Such  a  possibility  largely  eliminates  the  most  advan- 
tageous single  feature  of  incorporation — its  limited  liability — 
and  to  retain  this  feature,  while  still  preserving  the  actual 
form  of  the  partnership  name,  the  word  "  Incorporated  "  is  fre- 
quently added  to  this  latter.  This  usually  appears  in  small 
letters  below  or  after  the  name,  sometimes  in  parenthesis,  and 
effectually  prevents  any  danger  of  partnership  liability. 

In  some  states  the  word  "  Company  "  must  form  part  of 
every  corporate  name,  and  in  these  states  the  usual  practice  is 
to  adopt  the  partnership  name  with  the  word  company  follow- 
ing, Smith  &  Jones  becoming  on  incorporation  the  Smith  & 
Jones  Company.  This  practice  is  very  common  in  all  the 
states,  whether  required  by  law  or  otherwise,  and  is  generally 
preferable  to  the  use  of  the  unmodified  firm  name,  or  its  use  in 
connection  with  the  word  "  Incorporated." 

Another  common  modification  of  the  firm  name  is  to  sub- 
stitute a  hyphen  for  the  connecting  word  and  add  "  Company," 
Smith  &  Jones  then  becoming  the  Smith- Jones  Company.  In 
most  of  the  states  the  prefix  "  The  "  either  may  or  may  not 
be  made  part  of  the  corporate  name,  though  in  a  few  states  its 


270  SUNDRY    CONSIDERATIONS. 

use  is  obligatory.  Owing  to  the  additional  length  given  the 
corporate  name  by  its  use,  and  its  exceeding  awkwardness  in 
certain  legal  constructions,  the  word  "  The  "  is  better  omitted 
unless  there  are  special  reasons  for  its  retention.  (See  Chap. 
XIV,  The  Corporate  Name.) 

§  248.  Capitalization. 

If  the  business  is  to  go  on  under  the  corporate  form  just  as 
before,  without  sale  of  stock  to  outsiders,  the  simplest,  and 
possibly  most  satisfactory  basis  of  capitalization,  is  the  actual 
value  of  the  assets  turned  in  to  the  new  corporation,  without 
allowance  for  good-will,  trade  name  or  any  other  intangible 
assets.  Then  on  incorporation  each  partner  will  participate  in 
the  stock  by  which  this  capitalization  is  represented  to  the 
amount  of  his  existing  partnership  investment. 

Under  this  plan  the  capital  stock  of  the  new  company  is 
kept  at  a  comparatively  low  figure,  taxation  is  to  some  extent 
avoided,  while  the  respective  proportionate  interests  of  the 
different  partners  are  accurately  preserved.  As  will  be  readily 
seen,  no  very  exact  estimate  of  the  value  of  the  business  is 
necessary  under  this  arrangement.  The  capital  stock  merely 
serves  as  a  convenient  method  of  adjusting  the  proportionate 
interests  of  the  partners,  and  no  matter  what  its  amount,  these 
interests  are  still  represented  in  proper  proportion. 

If,  however,  new  members  are  to  be  taken  into  the  incor- 
porated business,  or  any  of  the  partners  expect  to  sell  stock,  or 
it  is  anticipated  that  at  any  time  in  the  near  future  stock  will 
change  hands,  the  proper  valuation  and  capitalization  of  the 
business  become  matters  of  considerable  importance.  Then 
the  value  of  the  good-will  should  be  added  to  the  property 
values;  also  any  other  intangible  assets,  such  as  trade  names, 
trade  marks  and  copyrights  should  be  included  at  a  fair  figure. 
All  of  these  are  valuable  assets  and  are  legitimately  represented 
in  the  capitalization  of  the  business. 

Any  desired  property  may,  of  course,  be  reserved  to  the 
partnership.  If  the  partners  wish  to  retain  a  portion  of  the 


INCORPORATING    A    PARTNERSHIP.  271 

cash  on  hand,  or  certain  portions  of  the  firm  realty  or  other 
property,  or  think  certain  accounts  better  in  their  own  hands, 
the  whole  matter  is  in  their  discretion.  They  may  retain  what 
they  will  and  transfer  what  they  will. 

The  form  of  capitalization  is  also  a  matter  of  conditions 
and  discretion.  It  may  be  all  common  stock,  or,  if  desired, 
preferred  stock  and  bonds  may  be  added.  The  matter  rests 
entirely  with  the  partners.  If  it  is  decided  to  issue  bonds  the  ' 
corporate  capitalization  will  naturally  be  reduced  by  just  that 
amount.  If  preferred  stock  is  issued,  the  common  stock  will 
be  reduced  by  that  amount,  but  the  total  capitalization  will 
remain  the  same. 

If  additional  capital  is  needed  for  the  business  of  the  new 
corporation,  and  stock  must  be  sold  to  secure  it,  the  amount  of 
capitalization  determined  by  the  total  value  of  the  partnership 
assets — including  good-will — would  be  increased  by  the 
amount  of  stock  to  be  so  sold. 

§  249.  Exchange  of  Property  for  Stock. 

The  value  of  the  partnership  business  and  property  having 
been  determined,  and  the  capitalization  of  the  corporation 
fixed  at  this  total  value,  the  business,  as  a  going  concern,  will 
be  offered  to  the  new  corporation  in  exchange  and  full  pay- 
ment for  all  its  capital  stock.  This  offer  should  be  by  formal 
written  proposition,  which  would  usually  be  signed  by  one  of 
the  partners  with  the  firm  name,  but  might  be  signed  by  all 
the  partners. 

This  proposition  is  usually  accepted  without  demur,  the 
new  corporation  authorizing  the  issue  of  its  capital  stock  in 
payment  for  the  property.  The  capital  stock  will  then  be 
issued  in  accordance  with  the  terms  of  the  proposition,  and 
the  partnership  business  and  property  as  tendered  will  be 
transferred  to  the  corporation,  usually  by  formal  bill  of  sale, 
though  sometimes  by  mere  delivery  of  possession,  and  the 
transaction  as  between  the  partnership  and  the  corporation  is 


272  SUNDRY    CONSIDERATIONS. 

complete.       (See    Chap.    XXXII,    Issuance    of    Stock    for 
Property.) 

The  corporation  then  owns  the  business  as  transferred  to 
it,  but  the  partnership  still  exists,  with  the  stock  as  its  sole 
asset,  unless  some  of  the  partnership  property  has  been  reserved 
from  the  sale  to  the  corporation.  The  distribution  of  this 
stock  among  the  partners  in  accordance  with  previous  agree- 
ments, or  usually  in  proportion  to  their  respective  firm  in- 
terests, completes  the  usefulness  of  the  partnership.  It  may 
then  be  continued  in  a  quiescent  condition,  be  dissolved  by 
formal  agreement,  or  merely  be  allowed  to  lapse.  If  no  part- 
nership property  was  reserved  and  the  stock  received  by  the 
firm  is  distributed,  and  there  are  no  special  reasons  for  its 
continuation,  dissolution  by  formal  agreement  is  the  better 
practice,  avoiding  any  possibility  of  subsequent  entanglements 
or  liabilities.  If  it  is  desired  to  avoid  all  possible  liability 
under  the  old  firm,  formal  notice  should  be  given,  by  mail  or 
publication,  of  the  incorporation  of  the  business  and  the  dis- 
solution of  the  partnership. 

§  250.  Stock  Adjustments. 

In  an  ordinary  partnership  when  the  investments  are 
equal,  or  nearly  so,  the  stock  received  in  exchange  for  the 
partnership  property  would  usually  be  all  common  stock 
and  would  be  distributed  among  the  partners  in  equal  pro- 
portion. If,  however,  the  interests  were  not  equal,  or  special 
conditions  were  to  be  met,  this  very  simple  arrangement 
might  be  varied  almost  indefinitely. 

At  times  preferred  stock  is  desired  by  the  partners  to 
represent  a  portion,  at  least,  of  the  property  transferred 
by  them  to  the  corporation.  Such  stock  has  the  advantage 
of  its  fixed  preferential  dividend  that  must  be  paid  if  any 
profits  are  made,  and  it  may  be  given  any  other  stock  powers 
or  privileges  deemed  necessary. 

At  other  times  the  partners  will  prefer  to  have  a  portion 
of  the  property  transferred  to  the  corporation  paid  for  by 


INCORPORATING    A    PARTNERSHIP.  273 

bonds.  Corporate  taxation  is  usually  thereby  avoided 
though  personal  taxation  may  be  proportionately  increased. 
Beyond  this,  bonds  are -a  safe  and  very  convenient  form  of 
corporate  security  to  hold  if  the  incorporated  business  is, 
in  whole  or  in  part,  going  into  new  hands. 

A  silent  partner's  interest  might  be  properly  provided 
for  by  a  preferred  stock,  drawing  a  preferential  dividend 
equal  to  the  rate  of  interest  theretofore  paid  upon  his  invest- 
ment, or  participating  otherwise  in  profits  to  the  same  extent 
as  his  investment  did  before.  This  preferred  stock  might 
be  allowed  to  vote,  or  if  it  were  not  desirable  that  the 
silent  partner  should  participate  in  the  management,  the  voting 
right  might  be  denied,  or  his  entire  interest  might  be  pro- 
vided for  by  an  issue  of  bonds  which  would  draw  a  fixed 
rate  of  interest  without  regard  to  profits,  but  could  not  vote. 

If  one  partner's  investment  were  much  larger  than  that 
of  other  partners,  but  equality  in  management  were  desired 
in  the  new  corporation,  such  excess  interest  might  be  pro- 
vided for  by  non-voting  preferred  stock,  by  a  bond  issue, 
or  by  an  issue  of  common  stock  without  the  voting  right. 
In  the  latter  case  such  partner  would  participate  in  all 
profits  on  the  basis  of  the  full  amount  of  stock  held  by  him 
but  would  not  vote  on  the  excess  portion.  If  his  excess 
investment  were  in  bonds  he  would  vote  and  participate  in 
dividends  on  the  basis  of  the  amount  of  stock  actually 
received  by  him,  but  would  receive  in  addition  the  fixed 
amount  of  interest  called  for  by  his  bonds.  Also  at  some 
specified  date  he  would  receive  payment  of  the  face  of  his 
bonds,  his  excess  investment  under  these  conditions  con- 
stituting a  preferred  claim  against  the  corporate  property. 
Under  the  preferred  stock  plan,  he  would  participate  in 
profits  to  the  full  on  his  quota  of  common  stock,  but  on  this 
preferred  stock  would,  presumably,  only  participate  in 
profits  to  the  extent  of  his  preferred  dividend.  The  final 
redemption  of  such  preferred  stock  might  or  might  not, 
according  to  the  arrangement,  take  precedence  over  any 


274  SUNDRY   CONSIDERATIONS. 

liquidation  of  the  common  stock.     (See  Chap.  VIII,  Pre- 
ferred Stock.) 

§  251.  Board  of  Directors. 

If  the  partners  take  the  amount  of  stock  in  the  new  cor- 
poration to  which  their  respective  firm  interests  entitle  them 
and  let  the  selection  of  the  board  take  its  natural  course 
thereafter,  the  matter  is  simple.  Usually,  however,  the 
partners  wish  an  equality  of  power  in  the  board,  or  a  speci- 
fied representation,  or  a  classification  or  some  other  arrange- 
ment, and  the  composition  and  method  of  electing  the  board 
of  directors  frequently  becomes  the  most  difficult  question 
arising  in  the  incorporation  of  a  partnership. 

Where  equality  of  power  is  desired  each  partner  will 
usually  designate  one  or  more  directors  so  that  the  com- 
pleted board  will  contain  an  equal  number  of  representatives 
for  each  partner.  Where  the  partnership  consists  of  three 
or  more,  the  usual  practice  is  to  make  the  number  of  direc- 
tors equal  to  the  number  of  partners,  elect  all  the  partners, 
or  the  chosen  representatives  of  any  partners  not  wishing  to 
appear  on  the  board,  and  then  make  provision  for  the  main- 
tenance of  the  board  so  constituted.  (See  §  252.) 

Where  there  are  two  partners,  the  matter  is  less  easily 
arranged.  Three  is  the  minimum  number  of  directors 
usually  allowed,  and  the  necessity  of  having  a  third  director 
who  really  has  the  deciding  vote  in  any  point  of  difference 
makes  the  situation  difficult.  Sometimes  a  confidential 
clerk,  or  a  mutual  friend,  or  the  wife  of  one  of  the  partners 
is  chosen,  but  in  event  of  any  difference,  the  result  is  apt 
to  be  very  unsatisfactory.  If  possible,  a  mutual  friend  of 
character  and  standing  may  be  elected  with  the  understand- 
ing that  he  is  not  to  be  involved  or  troubled  in  any  way  unless 
serious  difference  arises,  when  he  will  virtually  act  as  an 
arbitrator.  Another  plan  is  to  have  some  indifferent  person 
accept  the  office  and  immediately  resign,  leaving  the  third 
position  vacant  with  the  two  partners  in  control  to  fight 


INCORPORATING   A    PARTNERSHIP.  275 

out  any  differences  just  as  they  would  have  done  in  the  days 
of  partnership.  If  this  plan  were  objectionable  on  account 
of  the  incomplete  condition  of  the  board,  the  membership 
of  the  directorate  might  be  fixed  at  four,  each  partner  being 
elected  to  the  board  and  designating  an  additional  member. 
Arbitration  might  be  provided  for  in  case  of  a  deadlock. 

§  252.  Maintenance  of  Agreed  Management. 

When  the  composition  and  manner  of  election  of  the 
board  of  directors  has  once  been  decided,  some  means  of 
securing  the  permanency  of  the  agreed  arrangement  is 
usually  desirable.  If  mere  representation  of  the  minority 
interest  on  the  board  is  desired,  this  may  usually  be  secured 
by  the  adoption  of  cumulative  voting.  In  some  states,  how- 
ever, cumulative  voting  is  not  permissible,  and  in  many  cases 
more  than  minority  representation  is  desired.  Other  means 
must  then  be  adopted.  Some  of  these  are  as  follows : 

(a)  By  Voting  Trust. 

The  voting  trust  is  often  the  most  satisfactory  means  of 
preserving  the  agreed  status  of  corporate  management,  the 
members  of  the  old  partnership  usually  constituting  the 
membership  of  the  trust. 

The  objections  to  the  voting  trust  for  such  a  purpose  are 
its  limited  duration  and  the  fact  that  the  stock  owned  by  the 
partners  is  itself  locked  up  in  the  trust,  and,  for  purposes  oi 
sale,  or  other  use,  must  be  represented  by  trustees'  certifi- 
cates. 

In  New  York  the  life  of  a  voting  trust  is  by  statute 
expressly  limited  to  five  years,  and  it  is  doubtful  whether 
the  arrangement  could  be  enforced  or  continued  save  by 
mutual  consent  for  a  longer  period.  In  states  where  there 
is  no  legislative  provision  in  regard  to  the  voting  trust,  it 
is  probable  that  a  trust  for  the  purposes  of  maintaining  an 
agreed  management  would  be  sustained  for  any  reasonable 
period,  as  ten  or  even  more  years. 


276  SUNDRY    CONSIDERATIONS. 

In  case  of  the  formation  of  a  voting  trust  the  actual 
assignment  of  the  stock  to  the  trustees  cannot  be  avoided. 
Irrevocable  proxies  would  be  practically  impossible  under 
the  usual  conditions.  The  owners  of  the  stock  must  there- 
fore content  themselves  with  trustees'  certificates.  For  hold- 
ing and  for  some  other  purposes  these  certificates  would  not 
be  objectionable.  For  selling  or  for  use  as  collateral  they 
would  not  be  as  available  as  the  stock  itself.  (See  Chap. 
XXXV,  Voting  Trusts.) 

(b)  By  Voting  Requirements. 

In  most  states  where  special  charter  provisions  are 
allowed,  it  may  be  provided  that  any  desired  majority  shall 
be  necessary  for  the  election  of  directors  and  this  majority 
may  be  made  so  large — even  up  .to  the  unanimous  vote  of 
all  the  outstanding  voting  stock — that  the  agreed  status 
of  the  board  can  only  be  disturbed  by  the  active  consent 
of  all  interested  parties.  Deadlocks  may  occur  at  times 
under  such  a  provision  but  their  only  effect  would  be  to 
leave  the  board  in  statu  quo,  thus  maintaining  the  agreed 
arrangement  but  dispensing  with  the  election. 

It  would  be  but  rarely  advisable  or  wise  to  require  unani- 
mous consent  to  the  election  of  directors.  The  same  ends 
may  be  practically  secured  by  a  two-thirds  or  three-fourths 
majority  and  the  danger  of  factious  opposition  by  holders  of 
a  small  number  of  shares  is  thereby  avoided.  (See  §  242.) 

It  is  to  be  noted  that  under  this  arrangement  in  event  of 
the  death  or  resignation  of  a  director,  the  interests  for  which 
such  director  stood  would  be  unrepresented  on  the  board 
and  could  only  regain  such  representation  by  consent  of 
sufficient  stock  to  make  up  an  electing  majority.  This 
objection  to  the  plan  would  under  some  conditions  be  fatal. 

(c)  By  Classification  of  Stock. 

The  classification  of  stock  offers  a  very  permanent 
method  of  maintaining  a  representative  directorate.  Each 


INCORPORATING    A    PARTNERSHIP.  >  277 

partner's  stock  may  be  constituted  a  class  with  some  con- 
venient arbitrary  designation,  as  "  Class  A,"  "  Class  B,"  or 
"  Class  i,"  "  Class  2,"  etc.,  and  each  one  of  these  classes 
may  be  endowed  with  the  right  to  elect  one  or  more  direc- 
tors. If  desired,  one  class  may  be  allotted  a  greater  number 
of  directors  than  others,  though  usually  each  class  is  allowed 
equal  power  as  to  the  number  of  directors  it  may  elect. 

For  instance,  in  the  incorporation  of  a  partnership  with 
property  and  other  assets  of  the  estimated  value  of  $100,000, 
of  which  $50,000  belongs  to  one  partner,  $30,000  to  a  second 
and  $20,000  to  a  third,  it  might  be  desired  that  the  same 
equal  participation  in  the  management  that  characterized 
the  partnership  should  be  continued  in  the  corporation.  This 
might  be  effected  with  absolute  certainty  by  a  division  of  the 
stock  into  three  classes,  $50,000  in  the  first,  $30,000  in  the 
second  and  $20,000  in  the  third,  and  giving  to  each  class 
the  right  to  elect  one-third  of  the  membership  of  the  board. 
Each  partner  would  then  be  given  all  of  one  of  these  classes 
of  stock,  and,  notwithstanding  their  very  unequal  interests 
in  the  business,  each  would  elect  one-third  the  total  number 
of  directors.  If  it  were  not  desired  to  secure  this  absolute 
equality  in  the  management  of  the  business  but  merely  to 
insure  representation  to  the  two  minority  partners,  this  stock 
might  be  classified  as  before,  the  first  class  being  given  say  three 
directors  of  a  board  of  five  and  the  second  and  third  classes 
one  each,  or  any  other  apportionment  deemed  expedient 
might  be  made. 

Under  this  system  the  interests  holding  any  one  class 
are  absolutely  sure  that  so  long  as  they  hold  their  stock 
intact,  or  hold  a  clear  majority  of  it,  they  can  elect  their 
allotted  membership  of  the  board,  and  that  in  no  other  way 
than  by  the  purchase  of  at  least  a  majority  of  their  stock  can 
this  representation  be  wrested  from  them.  It  is  obvious  that 
the  plan  is  capable  of  considerable  variation  to  fit  the  con- 
ditions of  any  particular  case. 

A  modification  of  this  plan  where  equal  representation  is 


278  SUNDRY    CONSIDERATIONS. 

desired  is  to  divide  the  classified  voting  stock  equally  among 
the  partners  and  then  issue  preferred  stock  without  the 
voting  power  to  cover  the  excess  of  investment  of  any 
partner.  Also,  where  more  capital  is  desired,  such  non- 
voting  preferred  stock  may  be  sold  without  interfering  with 
the  original  division  of  power.  (See  §  98.) 

§253.  Officers. 

In  the  conversion  of  a  partnership  into  a  corporation 
little  difficulty  is  usually  experienced  in  the  selection  of 
officers,  the  partners  taking  these  positions,  and  their  pre- 
vious habits,  duties  and  positions  in  the  firm  designating 
with  more  or  less  precision  the  official  position  for  which 
each  is  best  fitted. 

It  may  be  noted,  however,  if  there  is  difficulty  in  the 
assignment  of  the  official  positions,  that  outside  of  a  few 
matters  specified  or  implied  by  the  statutes  of  some  states, 
the  powers  and  duties  of  officers  may  be  fixed  absolutely  by 
charter  or  by-laws.  In  New  Jersey  for  instance,  the  certifi- 
cates of  stock  must  be  signed  by  the  president  and  treasurer, 
certain  reports  must  be  signed  by  designated  officials,  and 
other  matters  of  minor  importance  are  required  of  specified 
officials.  Beyond  this,  however,  the  corporation  is  free  to 
authorize  its  officers  as  it  deems  best.  The  power  of  the 
president  may  be  so  restricted  that  he  is  incapable  of  inde- 
pendent action,  any  desired  limitations  may  be  placed  upon 
the  power  of  the  treasurer,  the  secretary  may  be  assigned 
any  powers  or  duties  that  the  conditions  seem  to  require, 
and  any  or  all  of  these  officers  may  be  made  as  dependent 
upon  or  independent  of  the  board  and  of  their  fellow  officers 
as  may  be  deemed  expedient. 

Usually  it  is  not  the  part  of  wisdom  to  vary  the  usual 
powers  and  relations  of  the  corporate  officers  but  occasion- 
ally in  the  adjustment  of  partnership  relations  under  the 
corporate  form  such  changes  may  be  made  to  advantage. 


CHAPTER   XXXIX. 
HOLDING   CORPORATIONS. 


§  254.  General. 

A  holding  corporation  in  the  modern  sense  of  the  term 
is  a  corporation  formed  for  the  express  purpose  of  controll- 
ing other  corporations  by  the  ownership  of  a  majority  of 
their  stock. 

Under  the  common  law,  which  did  not  permit  one  cor- 
poration to  invest  in  the  stock  of  another,  holding  corpora- 
tions were  impossible.1  The  common  law  rule  has,  however, 
been  gradually  relaxed  and  set  aside  until  now  the  purchase 
of  stocks  by  a  corporation  may  be  provided  for  in  most 
states  of  the  Union.  The  courts  have  held  that  corporations 
such  as  insurance  companies  which  necessarily  receive  large 
amounts  for  investment,  may  as  a  consequence  of  the  con- 
ditions and  without  specific  authorization,  purchase  stocks 
in  other  corporations.  Also,  any  corporation  is  allowed  to 
take  stock  to  save  a  debt,  or,  where  stock  has  been  deposited 
with  it  as  collateral  and  then  forfeited,  to  retain  and  hold 
such  forfeited  stock. 

The  general  right  to  purchase  and  hold  the  stock  of 
other  corporations,  under  which  the  holding  corporation  is 
possible,  is,  however,  derived  from  legislative  enactment, 
either  by  virtue  of  statutes  expressly  conferring  on  corpora- 
tions the  power  to  buy  and  hold  the  stocks  of  other  corpora- 
tions, or  under  the  operation  of  statutes  permitting  the 
formation  of  corporations  for  any  legitimate  purpose. 

§  255.  Statutory  Enactments. 

New  Jersey  was  the  first    state    to    enact    statutes    spe- 
cifically empowering  corporations  organized  under  its  laws 
"People  vs.  Pullman  Co.,  175  111.,  125  (1898),  64  L.  R.  A.,  366. 

279 


280  SUNDRY   CONSIDERATIONS. 

to  hold  the  stock  of  other  corporations.     This  law  was 
adopted  in  the  year  1888,  and  reads  as  follows: 

"  Any  corporation  may  purchase,  hold,  sell,  assign, 
transfer,  mortgage,  pledge  or  otherwise  dispose  of  the 
shares  of  the  capital  stock  of,  or  any  bond,  securities 
or  evidences  of  indebtedness  created  by  any  other  cor- 
poration or  corporations  of  this  or  any  other  state, 
and  while  owner  of  such  stock  may  exercise  all  the 
rights,  powers  and  privileges  of  ownership,  including 
the  right  to  vote  thereon."  §  51,  The  General  Cor- 
poration Law  of  New  Jersey. 

The  enactment  of  this  law  by  New  Jersey  paved  the 
way  for  the  great  industrial  combinations.  Theretofore  they 
had  been  attempted  by  the  appointment  of  a  board  of  trus- 
tees in  whose  hands  was  placed  a  majority  of  the  stock  of 
the  corporation  to  be  controlled,  these  trustees  then  electing 
boards  of  directors  who  managed  their  respective  corpora- 
tions in  the  common  interest.  This  arrangement  was 
declared  illegal  and  has  been  abandoned  for  the  holding 
corporation  under  the  New  Jersey  law.  (See  State  vs. 
Standard  Oil  Co.,  49  Ohio  St.,  137,  1892.)  (People  vs.  North 
River  Sugar  Refining  Co.,  121  N.  Y.,  582,  1890.) 

Delaware  and  Maine  have  enacted  statutes  similar  to 
those  of  New  Jersey,  permitting  corporations  to  buy,  hold 
and  sell  stocks,  and  in  New  York  these  privileges  may  be 
enjoyed  if  so  provided  in  the  charter. 

§  256.  Present  Status. 

At  the  present  time  the  holding  corporation  occupies  a 
position  of  great  importance,  being  the  means  by  which 
many  of  the  great  industrial  combinations  have  been  formed 
and  are  now  controlled.  Sometimes  these  corporations  are 
confined  strictly  to  the  function  of  holding  companies,  as 
in  the  case  of  the  Northern  Securities  Company  which  was 
formed  solely  to  hold  sufficient  stock  of  the  Great  Northern 
Railway  Company  and  the  Northern  Pacific  Railway  Com- 


HOLDING    CORPORATIONS.  281 

pany  to  control  the  two  companies  and  combine  their 
interests.  Usually,  however,  such  a  corporation  is  given, 
in  addition,  ample  powers  to  carry  on  directly  any  business 
or  industry  in  the  line  of  the  proposed  combination.  Then 
it  can  operate  by  controlling  the  majority  of  the  stock  of  its 
component  corporations,  or  by  buying  up  the  manufacturing 
plants  engaged  in  the  particular  industry,  or  by  initiating 
new  industrial  operations  on  its  own  account,  or  by  doing 
all  of  these  things.  The  United  States  Steel  Corporation 
has  such  a  charter  as  this  which  is  given  in  full  in  Part  VII 
of  this  work.  (See  Chap.  XL,  "Industrial  Combination.") 
It  is  possible  for  the  holding  corporation  itself  to  be  con- 
trolled by  the  ownership  of  but  fifty-one  per  cent,  of  its  stock, 
and  so  long  as  the  parties  in  control  hold  this  amount  they  can 
part  with  any  additional  stock  without  interfering  with  their 
control  of  the  holding  corporation  and  through  it  of  the  sub- 
sidiary corporations.  This  device  makes  it  possible  for  those 
who  are  on  the  inside  to  control  much  capital  with  a  compara- 
tively small  investment  on  their  own  part.  For  a  full  dis- 
cussion of  this  subject  see  Robotham  vs.  Prudential  Insurance 
Co.,  53  Atl.  Rep.,  842  (1903)  ;  i  Cook  on  Corporations,  §317, 
and  Noyes  on  Intercorporate  Relations,  §285  et  seq. 

§  257.  Limitations. 

The  holding  corporation  is  the  instrument  by  which  most 
of  the  great  industrial  combinations  have  been  effected  and  is 
generally  recognized  as  the  proper  legal  means  to  this  end. 
In  some  cases,  however,  these  corporations  may  be  found  to 
violate  provisions  of  the  laws  against  combinations  and 
monopolies.  It  is  also  more  than  possible  that  some  of  the 
states  may  pass  laws  to  prevent  foreign  holding  corporations 
from  controlling  corporations  formed  under  the  laws  of  such 
states. 

In  the  recent  Northern  Securities  case,  the  United  States 
courts  held  the  attempt  to  prevent  competition  between  two 
opposing  interstate  railways  by  means  of  a  holding  corporation 


282  SUNDRY    CONSIDERATIONS. 

illegal.     (See  Northern  Securities  Co.  vs.  United  States,  193 
U.  S.,  197,  1903.) 

In  any  case  of  abuse  of  power  by  means  of  a  holding  cor- 
poration, the  courts  would  undoubtedly  afford  relief.  (See 
Farmers'  Loan  and  Trust  Co.  vs.  N.  Y.,  etc.,  R.  Co.,  150  N.  Y., 
410,  1896;  Niles  vs.  N.  Y.  C.  &  H.  R.  R.  Co.,  69  App.  Div., 
N.  Y.,  144,  1902.) 

§  258.  Parent  Companies. 

A  useful  variant  of  the  holding  company  is  frequently  em- 
ployed with  advantage  in  the  exploitation  of  inventions.  A 
parent  corporation,  in  which  the  patent  rights  for  such  inven- 
tions are  vested,  is  formed  in  some  selected  state  where  the 
power  to  hold  the  stock  of  other  corporations  may  be  had. 
Subordinate  companies  are  then  formed  in  the  several  states 
or  other  territorial  districts,  and  to  these  companies  rights  in 
the  invention  are  assigned  for  their  respective  districts,  the 
parent  company  usually  reserving  or  acquiring  a  controlling 
interest  in  each  subordinate  company.  The  patent  rights 
may  be  sold  absolutely,  or  with  reservation  of  royalties,  or 
merely  a  license  may  be  issued.  The  subordinate  company  then 
operates  in  its  own  territory  as  an  independent  company,  but 
under  the  general  direction  of  the  parent  company,  this  direc- 
tion becoming  immediate  and  absolute  in  case  of  necessity. 

Under  this  plant  the  parent  corporation  makes  certain  the 
proper  fulfilment  of  its  contracts  with  the  subordinate  com- 
panies, and  also  the  proper  and  harmonious  conduct  of  the 
general  business. 

For  a  discussion  of  this  subject  see  People  vs.  Am.  Bell 
Telephone  Co.,  117  N.  Y.,  241  (1889.) 


CHAPTER  XL. 
INDUSTRIAL     COMBINATION. 


§  259.  General. 

The  modern  industrial  combination  is  an  aggregation  of 
corporations  of  like  or  collateral  purposes,  with  such  various 
additions  to  or  modifications  of  the  powers  and  holdings  of 
the  central  or  controlling  corporation  as  may  be  dictated  by  the 
particular  conditions.  The  term  "  trust,"  by  a  somewhat  sin- 
gular verbal  perversion,  is  applied  colloquially  to  such  a  com- 
bination to  express  the  idea  that  it  controls  a  sufficient  pro- 
portion of  the  industry  affected  to  give  it  more  or  less  of 
monopolistic  powers. 

In  former  days  combinations  of  this  kind  were  effected  by 
placing  the  controlling  stock  interests  of  the  various  corpora- 
tions in  the  hands  of  trustees,  who  by  this  means  elected  the 
majority  of  the  directors  of  each  corporation,  and  through  the 
compliant  boards  thereby  secured  dictated  the  policy  and  de- 
tails of  management  for  each  corporation.  Thus  competi- 
tion was  avoided  and  such  co-operation  secured  as  was  deemed 
necessary. 

This  arrangement  was,  however,  summarily  and  effectively 
checked  by  the  adverse  decisions  of  the  courts,  and  recourse 
was  then  had  to  the  unity  secured  by  combining  all  the  desired 
interests  under  one  dominating  central  corporation.  This 
method  now  prevails.  The  controlling  corporation  may  ac- 
quire the  properties  and  businesses  of  the  subordinate  corpora- 
tions outright,  thereby  effecting  a  consolidation,  or  may  pur- 
chase a  majority  interest  in  the  stock  of  each  one,  thereby  con- 
trolling their  operations,  or  a  combination  of  these  methods 
may  be  employed.  In  any  event,  the  result  is  the  same,  the 


284  SUNDRY    CONSIDERATIONS. 

absolute  domination  and  direction  of  the  business  and  policy 
of  each  of  these  subordinate  corporations  by  the  central  power. 

The  combinations  so  secured  are,  when  properly  arranged, 
very  effective,  are  upheld  by  the  courts,  and  apparently  with- 
stand successfully  the  varied  anti-trust  legislation  of  the  dif- 
ferent states  of  the  Union. 

The  organization  of  large  combinations  of  this  kind  is  a 
difficult  and  complicated  undertaking,  demanding  the  most 
skillful  promotion,  able  financing,  experienced  and  resource- 
ful counsel  and  general  business  and  executive  ability  of  the 
highest  .order.  A  brief  resume  of  the  usual  procedure  is 
given  in  the  following  sections : 

§  260.  Preliminaries. 

In  some  instances  the  initiative  in  forming  an  industrial 
combination  has  been  taken  by  the  leaders  of  the  particular  in- 
dustry. It  is  but  seldom,  however,  that  such  a  combination  has 
been  carried  through  by  these  leaders.  They  are  too  fully 
occupied,  lack  the  wide  experience,  and,  possibly,  the  financial 
position,  essential  to  the  formation  of  a  large  combination. 
Men  who  occupy  the  same  relative  position  in  the  financial 
world  that  these  leaders  do  in  the  industrial  world  are  usually 
requisite  to  success. 

Not  infrequently  the  movement  for  a  combination  will  be 
inaugurated  by  men  entirely  outside  the  industry  involved, 
these  men  being  actuated  by  the  exceptionally  rich  emolu- 
ments that  have  rewarded  the  promoters  of  successfully- 
effected  combinations.  These  promoters  may  be  financiers 
who  have  the  ability  to  secure  the  co-operation  of  the  repre- 
sentative men  of  the  industry  in  which  the  combination  is  to 
be  effected,  or  they  may  be  parties  of  no  great  financial  weight 
themselves,  but  able  to  interest  both  financiers  and  the  leaders 
of  the  particular  industry  in  the  combination  proposed.  In 
any  event,  if  the  combination  is  to  be  successful,  the  co-opera- 
tion of  the  leading  men  of  the  industry  is  essential,  and,  on  the 
other  side,  the  active  participation  of  men  of  sufficient  position 


INDUSTRIAL    COMBINATION.  285 

to  finance  the  proposed  combination,  either  directly  or  in- 
directly, is  equally  essential. 

Some  combinations  have  come  to  pass  as  the  resultant  of 
unsuccessful  "  pools,"  "  gentlemen's  agreements  "  and  other  in- 
effctive  devices  of  the  kind.  These  were  too  loose,  too  un- 
manageable and  too  easily  broken  to  accomplish  the  desired 
purpose,  and  have  been  abandoned  in  favor  of  the  stronger, 
more  effective  and  permanent  corporate  combination. 

Usually  the  details  of  any  proposed  combination  are 
mapped  out  in  advance,  possibly  by  the  promoters  and  the 
leading  men  of  the  particular  industry  involved,  or  by  a  com- 
mittee appointed  for  the  purpose  by  the  interested  parties.  In 
any  event,  a  careful  preliminary  investigation  of  the  whole 
matter  is  most  essential.  Such  an  investigation,  carried  out 
thoroughly  and  intelligently,  should  demonstrate  almost  con- 
clusively the  possibilities  of  the  proposition — should  deter- 
mine if  the  plan  is  practicable,  if  so,  under  what  conditions, 
and  whether  these  conditions  can  be  met.  If  the  results  of 
such  investigation  are  sufficiently  encouraging,  the  general 
plan  of  action  will  be  arranged  by  the  parties  in  charge,  a 
working  organization  of  some  kind  effected  among  them- 
selves and  the  actual  work  begun. 

§  261.  Option  Agreements. 

In  the  incipiency  of  the  combination  option  contracts  oc- 
cupy a  most  important  position.  These  are  in  effect  agree- 
ments between  the  promoters  of  the  proposed  combination  and 
the  owners  of  the  desired  properties,  defining  the  terms  upon 
which  these  properties  may  be  brought  into  the  combination. 
A  large  combination  could  hardly  be  formed  without  their 
employment,  and  generally  speaking,  the  greater  the  number 
of  desirable  options  secured  and  the  better  their  terms,  the 
greater  the  possibilities  of  success  for  the  combination  and  the 
larger  the  profits  of  promotion.  (See  Forms  46-51.) 

In  this  work  the  genius  of  the  promoter  has  full  play  and 
much  depends  upon  his  ability  and  efficiency.  The  best  possi- 


286  SUNDRY   CONSIDERATIONS. 

ble  terms  must  be  obtained  from  those  willing  to  enter  the 
combination,  and  unwilling  owners,  by  persuasion,  argument 
and  even  covert  threats,  must  be  brought  into  line.  In  some 
cases  the  demands  of  owners  are  extravagant  and  unjustifi- 
able, and  it  then  frequently  becomes  a  matter  of  nice  judgment 
whether  their  demands  shall  be  acceded  to  or  they  shall  be 
left  out,  temporarily  at  least.  It  is  at  times  easier  to  deal  with 
such  cases  after  the  actual  formation  of  the  trust. 

Sometimes  conditional  options  are  secured  on  a  few  of 
the  most  important  plants  of  a  particular  industry  before  any 
other  attempt  is  made  to  formulate  the  trust.  These  options 
are  then  made  the  basis  upon  which  the  lesser  plants  are  invited 
to  enter  the  combination. 

Occasionally  options  are  taken  without  accurate  appraise- 
ment or  other  valuations,  the  parties  in  charge  being  willing 
to  take  the  properties  in  on  the  owner's  terms.  Usually,  how- 
ever, the  option  price  is  contingent  on  verification  by  subse- 
quent inspection  and  appraisement.  Or  the  price  is  left  con- 
tingent on  the  results  of  such  later  inspection  and  appraise- 
ment. 

These  options  may  be  on  the  plants  direct,  or  on  a  sufficient 
stock  interest  in  the  corporations  to  carry  their  control.  Some- 
times options  on  the  stock  will  include  an  agreement  by  the 
directors  and  stockholders  to  sell  the  entire  assets  of  the  com- 
pany. The  option  prices  are  usually  made,  as  far  as  possible, 
payable  in  the  stock  or  other  securities  of  the  combination. 

§  262.  Inspection  and  Appraisements. 

In  the  organization  of  any  large  combination,  the  inspec- 
tion and  appraisement  of  the  various  properties  and  businesses 
involved  is  a  matter  of  much  difficulty  and  of  the  greatest  im- 
portance. Expert  accountants  go  over  the  books  and  accounts 
of  the  various  concerns  and  compile  carefully  itemized  reports, 
going  back  a  number  of  years  and  showing  the  business  done, 
the  expenses  and  the  profits,  as  well  as  the  existing  conditions. 
Appraisers  meanwhile  take  careful  and  detailed  inventories  of 


INDUSTRIAL   COMBINATION.  287 

the  plants  and  stocks  with  full  estimates  and  valuations.  In 
both  cases  the  investigations  are  extensive  in  their  range  and 
the  reports  embodying  their  results  should  be  accurate  as  to 
fact  and  conservative  as  to  deduction.  Condensed  and  tabu- 
lated statements  are  made  from  these  reports. 

These  tabulations  are  used  for  two  general  purposes;  the 
one,  to  determine  the  actual  values  of  the  properties  and  the 
basis  upon  which  they  may  be  properly  taken  into  the  trust; 
the  other,  which  is  even  more  important,  to  determine  what 
net  income  is  likely  to  result  from  the  united  properties  when 
operated  under  the  economies  possible  to  such  a  combination. 

The  combinations  of  the  early  part  of  the  decade  were 
generally  over-capitalized,  mainly  because,  in  nearly  every  case, 
the  calculations  were  predicated  upon  the  few  years  immedi- 
diately  preceding,  which  had  been  years  of  great  prosperity 
for  all  manufacturing  interests.  It  is  probable  that  the  ac- 
countants and  appraisers  did  their  work  in  these  cases  with 
entire  correctness,  but  the  data  and  the  estimates  drawn 
therefrom,  being  based  on  exceptional  conditions,  were  mis- 
leading when  applied  to  a  future  to  which  these  exceptional 
conditions  did  not  extend. 

It  has  also  since  become  evident  that  the  economies  of  com- 
bination were  generally  exaggerated,  and  that  in  some  cases, 
instead  of  destroying  competition,  the  conditions  under  which 
the  combinations  were  formed  necessitated  an  increase  of 
prices  to  a  point  that  actually  stimulated  competition.  The 
over-capitalized  trusts  were  then  the  principal  sufferers  in  the 
industrial  war  they  had  themselves  provoked. 

It  need  hardly  be  said  that,  while  the  general  industrial  con- 
ditions preceding  and  existing  at  the  time  of  the  formation  of 
a  trust  should  be  given  full  weight  in  its  capitalization  and 
general  arrangement,  such  conservative  allowance  should  also 
be  made  for  the  years  to  come,  that,  no  matter  what  the  condi- 
tions, short  of  an  industrial  crisis,  the  combination  will  survive 
in  good  condition.  If  this  is  done  the  combination  is  a  safe  one. 
If  not,  it  is  intrinsically  unsound. 


288  SUNDRY   CONSIDERATIONS. 

§  263.  Underwriting. 

In  all  important  combinations  of  late  years  underwriting 
has  been  an  important  feature.  The  obvious  purpose  of  this 
underwriting  is  to  assure  the  sale  of  the  combination's  se- 
curities. In  most,  if  not  all  cases,  an  equally  important  pur- 
pose is  the  immediate  cash  to  be  secured  thereby. 

Any  large  combination  is  practically  impossible  without 
considerable  amounts  of  ready  cash.  Payments  must  be  made 
on  options.  Debts  or  bonds  that  encumber  desired  properties 
must  be  paid.  The  direct  organization  expenses  are  heavy. 
When  the  properties  are  taken  over,  large  payments  are 
usually  required.  An  adequate  operating  capital  is  a  necessity. 
Most,  if  not  all,  of  these  demands  must  be  met  before  money 
can  be  secured  from  the  public  by  the  sale  of  stock  or  other 
securities  of  the  combination. 

The  underwriting  meets  this  emergency  effectually.  The 
underwriters  themselves  may  agree  to  pay  or  advance  certain 
amounts  of  cash  on  their  underwriting.  Usually,  however, 
the  money  is  secured  from  some  financial  institution  on  the 
strength  of  the  underwriting  and  the  pledges  of  the  incipient 
combination,  or  of  its  trustees.  If  the  underwriting  is  re- 
sponsible and  sufficient  in  amount  the  necessary  cash  is  readily 
secured. 

The  underwriting,  if  made  by  suitable  parties,  is  also  a 
strong  endorsement  of  the  combination.  It  means  that  if  the 
public  do  not  buy  the  securities  offered  by  the  trust  the  under- 
writers will,  and,  if  these  underwriters  are  responsible,  their 
opinion,  as  indicated  by  this  obligation,  has  great  weight  with 
the  investing  public.  The  successful  organization  of  the  great 
modern  industrial  combinations  could  hardly  have  been 
achieved  without  the  ready  financial  aid  afforded  by  the 
modern  system  of  underwriting.  (See  Chap.  XXXIV,  Under- 
writing.) 


INDUSTRIAL    COMBINATION.  289 

§  264.  Organization. 

The  general  rule  in  large  combinations  is  to  issue  preferred 
stock  to  the  value  of  the  actual  property  assets,  and  then  issue 
common  stock  in  addition  up  to  the  estimated  earning  powers 
of  the  combination.  As  in  recent  years  the  earning  capacity 
has  been  usually  estimated  on  the  basis  of  preceding  pros- 
perous years,  with  a  too  liberal  addition  to  cover  the  savings 
resulting  from  the  supposed  economies  of  trust  management, 
the  common  stock  of  most  of  the  later  trusts  has  generally  de- 
preciated and  has  little  value,  except  as  derived  from  its  voting 
power. 

Bonds  are  not  usually  issued  at  the  time  of  organization, 
unless  there  are  existing  bonds  or  other  obligations  on  some  of 
the  desired  properties  or  corporations  which  must  be  taken  up 
by  bonds  of  the  combination.  If  issued,  interest  must  be  paid 
when  due,  regardless  of  profits  or  losses,  and  this  necessarily 
may  result  in  disaster.  Also,  the  bonds  themselves  must  be 
redeemed  at  maturity,  and  this  may  be  difficult.  It  is,  there- 
fore, a  recognized  rule  that  bonds  must  only  be  issued,  if  at 
all,  in  a  very  small  proportion  to  the  capitalization.  The  Ship- 
yard Trust  is  the  only  prominent  example  in  which  this 
prudent  rule  was  openly  and  flagrantly  disregarded,  and  here 
the  very  unfortunate  results  testify  forcibly  to  the  soundness 
of  the  general  rule. 

The  charter  will  probably  be  taken  out  under  the  laws  of 
New  Jersey,  these  laws  having  been  expressly  framed  to  per- 
mit the  formation  and  convenient  operation  of  corporate  com- 
binations doing  business  in  many  states.  ( See  §  24. ) 

The  final  organization  of  a  trust  does  not  differ  from  that 
of  any  other  incorporation  and  proceeds  along  the  lines  indi- 
cated in  Chapters  XXX  to  XXXII  of  the  present  volume. 
Temporary  incorporators  and  directors  are  the  rule,  though, 
in  the  incorporation  of  the  Carnegie  Steel  Company  and  a  few 
other  combinations  of  importance,  the  real  parties  in  interest 
participated  in  the  first  organization.  (See  Charter  Forms, 
Part  VII.) 


PART  VIL— FORMS  AND  PRECEDENTS. 


CHAPTER  XLI. 
CHARTER  FORMS. 


Form  i. — Connecticut  Charter. 


CERTIFICATE  OF  INCORPORATION 

of 
THE   NATIONAL  PUBLICITY    CORPORATION. 

We,  the  subscribers,  certify  that  we  do  hereby  associate  ourselves  as  a 
body  politic  and  corporate,  under  and  by  virtue  of  the  provisions  of  an  act 
of  the  General  Assembly  of  the  State  of  Connecticut,  entitled  "  An  Act 
Concerning  the  Formation  of  Corporations,"  being  chapter  157  of  the  Public 
Acts  of  1901,  and  all  acts  amendatory  thereof ;  and  we  further  certify : 

First — That  the  name  of  the  corporation  is 

"  THE  NATIONAL  PUBLICITY  CORPORATION." 

Second — That  said  corporation  and  its  principal  office  or  place  of  busi- 
ness is  to  be  located  in  the  Town  of  Hartford,  in  the  State  of  Connecticut. 

Third — That  the  nature  of  the  business  to  be  transacted  and  the  purposes 
to  be  promoted  or  carried  out  by  said  corporation  are  as  follows : 

(a)  To  act  as  and  carry  on  the  general  business  of  advertising  agents 
and  to  engage  in  and  conduct  the  business  of  advertising  in  all  its 
branches,  including  the  preparation  and  arrangement  of  advertise- 
ments and  advertising  matter  of  all  kinds ;  the  purchase,  preparation, 
manufacture,  utilization  and  disposal  of  advertising  toys,  pictures, 
devices,  novelties,  inventions  and  all  other  means  and  instru- 
mentalities for  advertising;  the  acquisition  and  preparation  of  adver- 
tising space  and  facilities,  mural  and  of  independent  construction, 
and  the  letting  and  selling  of  space  and  privileges  upon  the  same, 
and  the  purchase  and  utilization  of  all  letters  patent,  patent  rights, 
trademarks  and  copyrights  pertaining  to  or  useful  in  the  conduct 
of  the  said  business  of  advertising. 

(&)  To  buy,  sell,  manufacture  and  deal  generally,  as  printers, 
publishers,  stationers,  engravers,  designers,  booksellers  and  pro- 
prietors and  publishers  of  newspapers,  magazines,  periodicals,  literary 
works  and  publications  and  printed  and  illustrated  matter  of  all 
kinds  and  descriptions. 

(c)  To  engage  generally  in  the  art,  trade  and  business  of  photo- 
graphic printing,  photo-engraving,  lithographing  and  all  other  modes 

290 


CHARTER    FORMS.  291 

of  reproducing  or  producing  printing,  engraving,  drawings,  paintings, 
pictures  and  representations  and  impressions  of  all  kinds,  in  color 
or  otherwise. 

Fourth — That  the  amount  of  the  capital  stock  of  said  corporation  hereby 
authorized  is  two  thousand  dollars  ($2,000).  divided  into  twenty  (20) 
shares,  of  the  par  value  of  one  hundred  dollars  ($100)  each. 

Fifth — That  said  corporation  will  commence  business  with  a  capital 
stock  of  one  thousand  dollars  ($1,000). 

Sixth — That  no  period  is  hereby  limited  for  the  duration  of  said  corpo- 
ration. 

Seventh — Signature  of  incorporators : 

NAMES.  RESIDENCES. 

Adam   M.  Johnson City  and  State  of  New  York. 

William   C.   Kelsey City  and  State  of  New  York. 

James  L.  Sands City  and  State  of  New  York. 

Dated  at  New  York  this  I4th  day  of  March,  1908. 

(Affidavit  of  incorporators  to  truth  of  certificate.) 


Form  2. — Delaware  Charter. 

CERTIFICATE  OF  INCORPORATION 

of  the 
INTERSTATE  BISCUIT  COMPANY. 

First — The  name  of  this  corporation  shall  be 

"INTERSTATE  BISCUIT  COMPANY/' 

Second — Its  principal  office  in  the  State  of  Delaware  shall  be  located 
in  the  City  of  Wilmington  and  County  of  New  Castle.  The  agent  in  charge 
thereof  shall  be  Philip  L.  Garrett 

Third — The  objects  and  purposes  for  which  this  corporation  is  formed 
are  to  do  any  and  all  of  the  things  herein  set  forth,  as  fully  and  to  the  same 
extent  as  natural  persons  might  or  could  do,  and  in  any  part  of  the  world, 
namely : 

(a)  To  manufacture,  buy,  sell,  pack,  prepare  and  generally  to 
deal  in  and  with  biscuits,  crackers,  cakes,  Italian  paste,  confectionery, 
cereals,  coffees,  teas,  dried  fruits,  and  foods  and  food  products  and 
materials  of  all  kinds,  either  raw  or  manufactured,  that  may  be  used 
in  foods  and  food  products  and  beverages,  or  for  the  packing,  adapt- 
ing, preparing  or  preserving  of  such  foods,  food  products  or  bever- 
ages; and  generally  to  mix,  adapt,  refine,  prepare,  preserve,  manu- 
facture and  dispose  of  all  such  goods,  wares,  merchandise  and 
materials,  either  in  original  packages  or  in  such  cans,  jars,  boxes, 
cartons  or  other  containing  packages  as  may  be  found  desirable. 

(fc)  To  purchase,  lease  or  otherwise  acquire  lands,  buildings, 
tenements  and  factories  in  Delaware  or  elsewhere,  for  the  plants, 
offices,  workshops,  warehouses,  laboratories  and  manufactories  of  the 
Company,  and  to  purchase,  lease  or  otherwise  acquire  tools,  imple- 
ments, engines,  machinery,  apparatus,  fixtures  and  conveniences  of 
all  kinds  for  the  manufacture,  manipulation,  preparation,  preserva- 


eve  FORMS   AND    PRECEDENTS. 

tion,  packing  and  handling  of  the  materials  antf  products  of  the 
Company. 

(c)  To  apply  for,  obtain,  purchase,  lease  or  otherwise  acquire, 
and  to  register,  hold,  own  and  use  any  and  all  trademarks,  trade 
secrets,  processes,   formulae,   inventions   and  improvements  capable 
of  being  used  in  connection  with  the  work  of  the  Company,  whether 
secured  under  letters  patent  in  the  United  States,  or  elsewhere  or 
otherwise;  and  to  use,  operate  and  manufacture  under  the  same,  and 
to  sell,  assign,  grant  licenses  in  respect  of  or  otherwise  dispose  of 
and  turn  the  same  to  the  account  and  profit  of  the  Company. 

(d)  To  do  any  and  all  things  set  forth  in  this   certificate  as 
objects,  purposes,  powers  or  otherwise  to  the  same  extent  and  as 
fully  as  natural  persons  might  do,  and  in  any  part  of  the  world,  as 
principals,   agents,   contractors,   trustees   or   otherwise,   and   either 
alone  or  in  company  with  others. 

(e)  To  have  offices,  conduct  its  business  and  promote  its  objects 
within  and  without  the  State  of  Delaware,  in  other  States,  the  Dis- 
trict of  Columbia,  the  territories  and  colonial  dependencies  of  the 
United  States,  and  in  foreign  countries,  without  restriction  as  to 
place  or  amount. 

Fourth — The  amount  of  the  total  authorized  capital  stock  of  this  corpo- 
ration is  Five  Hundred  Thousand  Dollars  ($500,000),  divided  into  five 
thousand  (5,000)  shares  of  the  par  value  of  One  Hundred  Dollars  ($100) 
each. 

The  amount  of  capital  stock  with  which  this  corporation  will  commence 
business  is  the  sum  of  One  Thousand  Dollars  ($1,000). 

Fifth — The  names  and  residence  of  each  of  the  original  subscribers  to 
the  capital  stock  are  as  follows : 

NAMES.  RESIDENCES. 

Francis  G.  Fawcett Pittsburgh,  Pa. 

Randolph  C.  Blythe Pittsburgh,  Pa. 

A.  C.  Bentley Philadelphia,  Pa. 

Sixth — The  existence  of  this  corporation  shall  be  perpetual. 

Seventh — The  private  property  of  the  stockholders  shall  not  be  subject 
to  the  payment  of  corporate  debts  to  any  extent  whatever. 

Eighth — The  Directors  shall  have  power  to  make,  alter,  amend  and 
repeal  the  By- Laws ;  to  fix  the  amount  to  be  reserved,  and  to  authorize  and 
cause  to  be  executed  mortgages  and  liens,  without  limit  as  to  amount,  upon 
the  property  and  franchises  of  this  corporation. 

With  the  consent  in  writing,  and  pursuant  to  a  vote  of  the  holders  of 
a  majority  of  the  capital  stock  issued  and  outstanding,  the  Directors  shall 
have  power  and  authority  to  dispose,  in  any  manner,  of  the  whole  prpperty 
of  this  corporation. 

The  Directors  shall  from  time  to  time  determine  whether  and  to  what 
extent  the  accounts  and  books  of  this  Corporation,  or  any  of  them,  shall 
be  open  to  the  inspection  of  the  stockholders ;  and  no  stockholder  shall  have 
any  right  of  inspecting  any  account,  or  book,  or  document  of  this  Corpora- 
tion, except  as  conferred  by  law,  or  the  By-Laws,  or  by  resolution  of  the 
stockholders. 

The  stockholders  and  Directors  shall  have  power  to  hold  their  meetings 
and  keep  the  books,  documents  and  papers  of  the  Corporation  outside  of  the 
State  of  Delaware,  at  such  places  as  may  be  from  time  to  time  designated 
by  the  By- Laws  or  by  resolution  of  the  stockholders  or  Directors,  except  as 
otherwise  required  by  the  laws  of  Delaware. 


CHARTER    FORMS.  293 

It  is  the  intention  that  the  objects,  purposes  and  powers  specified  in  the 
third  paragraph  hereof  shall,  except  where  otherwise  expressed  in  said 
paragraph,  be  nowise  limited  or  restricted  by  reference  to  or  in  inference 
from  the  terms  of  any  other  clause  or  paragraph  in  this  certificate  of  incor- 
poration, but  that  the  objects,  purposes  and  powers  specified  in  the  third 
paragraph  and  in  each  of  the  clauses  or  paragraphs  of  this  charter  shall  be 
regarded  as  independent  objects,  purposes  and  powers. 

We,  the  undersigned,  for  the  purpose  of  forming  a  corporation  under  the 
laws  of  the  State  of  Delaware,  do  make,  file  and  record  this  certificate, 
and  do  certify  that  the  facts  herein  stated  are  true ;  and  we  have  accord- 
ingly hereunto  set  our  respective  hands  and  seals,  this  seventeenth  day  of 
March,  A.  D.  1908. 

FRANCIS  G.  FAWCETT.  [SEAL.] 
RANDOLPH  C.  BLYTHE.  [SEAL.] 
A.  C.  BENTLEY.  [SEAL.] 

In  presence  of 

(Acknowledgment  in  due  form.) 


Form  3. — Maine  Charter. 


.     ARTICLE  OF  AGREEMENT 

of 
THE  MARCHMONT  DRUG  COMPANY. 

We,  the  undersigned,  hereby  associate  ourselves  together  for  the  pur- 
pose of  forming  a  corporation  under  the  laws  of  Maine. 

First — The  name  of  the  said  corporation  shall  be 

"  THE  MARCHMONT  DRUG  COMPANY." 

Second — The  purposes  for  which  it  is  to  be  formed  are : 

(1)  To  acquire  and  take  over  from  the  Marchmont  Drug  Corpo- 
ration, a  corporation  under  the  laws  of  New  Jersey,  but  having  its 
factory  and  principal  place  of  business  in  the  City  of  New  York, 
the  recipes  and  formulae  for  and  information  as  to  the  processes  of 
manufacturing  and  preparing  and  the  right  to  prepare,  manufacture 
and  deal  in  the  proprietary  articles  and  medicines  owned  by  the 
said  New  Jersey  corporation,  together  with  the  trade  names,  trade- 
marks and  patented  preparations  owned  by  said  corporation,  and 
all  its  plant,  factory  and  offices  held  under  lease  in  said  City  of 
New  York,  and  all  the  apparatus  and  appliances  and  materials  therein 
contained. 

(2)  To  buy,  sell,  refine,  prepare,  manufacture,  manipulate,  import, 
export  and  deal  in  and  with  all  substances,  materials,  apparatus  and 
things  capable  of  being  used  in  connection  with  the  preparation  and 
manufacture  of  the  articles  and  remedies  which  this  company  may 
become  entitled  to  prepare  and  manufacture,  and  to  construct,  main- 
tain arid  alter  any  plant,  buildings  or  factories  and  laboratories  suit- 
able or  convenient  for  the  purposes  of  the  company. 

(3)  To  carry  on  the  business  of  chemists,  druggists,  chemical 
manufacturers,  importers,  exporters  and  dealers  in  chemical,  pharma- 
ceutical, medicinal  and  other  preparations  and  chemicals. 

Third—  Said  corporation  shall  be  located  and  shall  have  its  principal 
office  at  Portland,  in  the  County  of  Cumberland  and  State  of  Maine. 


294  FORMS   AND   PRECEDENTS. 

Fourth — We  do  hereby  waive  all  statutory  requirements  as  to  notice 
of  the  first  meeting  for  organization,  and  hereby  call  such  first  meeting 
for  the  6th  day  of  March,  1908,  at  3  o'clock  P.  M.,  at  the  office  of 
Wellman  &  Shields,  in  Portland,  Maine,  and  we  hereby  consent  to  the 
transaction  of  all  such  business  as  may  come  before  said  meeting  or  at  any 
adjournment  thereof. 

Dated  this  27th  day  of  February,  1908. 

MORTON  RHOADES. 

Louis  HOFFMAN. 

ROBERT  W.  STYLES. 


The  foregoing  articles  are  sent  to  Maine,  accompanied  by 
the  subscriptions  of  the  parties  for  one  share  each  of  stock, 
with  proxies  signed  by  these  parties  in  blank.  Four  residents 
of  Maine  are  then  introduced  into  the  matter,  likewise  sign  the 
articles,  subscribe  for  one  share  each  of  stock  and  the  blank 
proxies  are  made  out  to  one  or  more  of  them  as  convenient. 
These  Maine  parties,  being  a  majority  of  the  incorporators 
and  holding  proxies  from  all  the  other  incorporators,  are  fully 
empowered  to  act  and  hold  the  first  meeting. 

This  meeting  adopts  by-laws,  fixes  the  amount  of  capital 
stock  and  elects  directors  and  officers.  A  certificate  of  organ- 
ization is  then  prepared,  is  signed  by  the  officers  and  filed  in 
the  office  of  the  Secretary  of  State.  The  corporate  existence 
begins  from  the  date  of  filing  of  this  certificate,  which  is  in 
form  as  follows: 

STATE    OF   MAINE. 
CERTIFICATE  OF  ORGANIZATION  OF  A  CORPORATION  UNDER  THE  GENERAL  LAW. 

The  undersigned,  officers  of  a  corporation  organized  at  Portland,  Maine, 
at  a  meeting  of  the  signers  of  the  articles  of  agreement  therefor,  duly  called 
and  held  at  the  office  of  Wellman  &  Shields,  in  the  City  of  Portland,  on 
Friday,  the  6th  day  of  March,  A.  D.  1908,  hereby  certify  as  follows: 

The  name  of  said  corporation  is 

"  THE  MARCHMONT  DRUG  COMPANY/' 

The  purposes  of  said  corporation  are : 

(As  set  forth  in  Articles  of  Agreement.) 
The    amount   of   capital    stock   is    One    Hundred  Thousand    Dollars 

($100,000). 

The  amount  of  common  stock  is  One  Hundred  Thousand  Dollars 
($100,000). 

The  amount  of  preferred  stock  is  nothing. 


CHARTER    FORMS.  295 

The  amount  of  capital  stock  already  paid  in  is  nothing. 

The  par  value  of  the  shares  is  One  Hundred  Dollars  ($100). 

The  names  and  residences  of  the  owners  of  said  shares  are  as  follows : 

NO.  OF 

NAMES.  RESIDENCES.  SHARES. 

Morton  Rhoades  New  York,  New  York 

Louis  Hoffman New  York,  New  York 

Robert  W.  Styles.... New  York,  New  York 

Wm.  P.  Darby Portland,  Maine 

H.  C.  Fisher Portland,  Maine 

Thos.  Ashby Portland,  Maine 

Oliver  Haines Portland,  Maine 

Number  of  shares  of  stock  unsubscribed 993 

Total  number  of  shares  of  stock 1,000 

Said  corporation  is  located  at  Portland,  in  the  County  of  Cumberland. 

The  number  of  directors  is  three  and  their  names  are  Wm.  P.  Darby, 
H.  C.  Fisher  and  Thos.  Ashby. 

The  name  of  the  Clerk  is  Wm.  P.  Darby  and  his  residence  is  Portland. 

The  undersigned  H.  C.  Fisher  is  President;  the  undersigned  Thos. 
Ashby  is  Treasurer ;  and  the  undersigned  Wm.  P.  Darby,  H.  C.  Fisher  and 
Thos.  Ashby  are  a  majority  of  the  directors  of  said  corporation. 

Witness  our  hands  this  seventh  day  of  March,  A.  D.  1908. 

H.  C.  FISHER,  President. 
THOS.  ASHBY,  Treasurer. 
WM.  P.  DARBY,  1 
H.  C.  FISHER,     [-Directors. 
THOS.  ASHBY,    J 

(Affidavit  of  directors  in  due  form.) 

(Certificate  of  Attorney-General   that   the   certificate   is   conformable   to 

Maine  law.) 


Form  4. — South  Dakota  Charter. 

ARTICLES  OF  INCORPORATION 

of 
ANDES   EXPLORATION   AND    DEVELOPMENT   COMPANY. 


Know  All  Men  By  These  Presents : 

That  we,  the  undersigned,  George  N.  Wright,  James  Powers  and  John 
E.  Evans,  for  ourselves,  our  associates  and  successors,  have  associated 
ourselves  together  for  the  purpose  of  forming  a  corporation  under  and  by 
virtue  of  the  statutes  and  laws  of  the  State  of  South  Dakota,  and  we  do 
hereby  certify  and  declare  as  follows,  viz. : 

First — The  name  of  this  corporation  shall  be 

"ANDES  EXPLORATION  AND  DEVELOPMENT  COMPANY." 

Second — The  purpose  for  which  this  corporation  is  formed  is  to  conduct 
the  business  of: 

i.  Mining,  smelting,  refining,  reducing  and  dealing  in  and  with 
all  sorts   of  ores,  metals,  minerals,  and  the  prospecting,  locating, 


296  FORMS   AND    PRECEDENTS. 

opening,  operating  and  developing  of  mines,  oil  wells,  quarries  and 
mineral  deposits  of  all  descriptions. 

2.  Constructing  and  operating  mills,  factories,  machine  shops  and 
industrial  plants  of  all  descriptions,  and  the  buying,  selling  and  deal- 
ing in  and  with  all  supplies,  merchandise  and  materials,   raw  or 
prepared,  useful  or  convenient,  in  connection  therewith. 

3.  Establishing  and  conducting  savings  institutions,   loan,  trust 
and  investment  companies,  and  guarantee  and  insurance  institutions, 
either  directly  or  indirectly,  in  such  form  and  manner  as  the  laws 
may  permit. 

4.  Farming,  planting  and  tilling  the  soil  and  the  operating  of 
farms,  ranches,  orchards,  plantations  and  haciendas,  and  all  industries 
appurtenant  thereto. 

5.  Constructing  and  operating  tramroads,  canals,  irrigating  sys- 
tems, steamboats,  steamships  and  ships  and  vessels  of  all  kinds. 

6.  Buying,  selling,  leasing  and  improving  lands,  town  sites  and 
territories,  and  laying  out,  plotting,  subdividing  and  colonizing  the 
same. 

Third — The  place  where  the  principal  business  of  this  corporation  shall 
be  transacted  is  Pierre,  in  the  County  of  Hughes  and  State  of  South 
Dakota,  but  a  branch  office  may  be  located  at  New  York  City,  where  said 
corporation  may  hold  meetings  of  its  stockholders  and  directors,  and  the 
said  corporation  may  do  business  in  any  part  of  the  world. 

Fourth — The  term  for  which  this  corporation  shall  exist  shall  be  twenty 
(20)  years. 

Fifth — The  number  of  directors  of  this  corporation  shall  be  five  (5), 
and  the  names  and  residences  of  such,  who  are  to  serve  until  the  election 
of  their  successors,  are  as  follows : 

NAMES.  RESIDENCES. 

George  N.  Wright New  York  City,  N.  Y. 

James  Powers New  York  City,  N.  Y. 

Henry  Decker Brooklyn,  N.  Y. 

John  E.  Evans Pierre,  S.  D. 

Richard  Conley  Pierre,  S.  D. 

Sixth — The  amount  of  the  Capital  Stock  of  this  Corporation  shall  be 
and  is  Two  Million  Five  Hundred  Thousand  Dollars  ($2,500,000),  divided 
into  Two  Hundred  and  Fifty  Thousand  (250,000)  Shares,  of  the  par  value 
of  Ten  Dollars  ($10)  each. 

In  Testimony  Whereof,  we  have  hereunto  set  our  hands  this 
I4th  day  of  March,  1908. 

(Signed)  GEORGE  N.  WRIGHT. 

JAMES  POWERS. 
JOHN  E.  EVANS. 

(Acknowledgments  in  due  form.) 

(Special  affidavit  by  two  incorporators  that  incorporation  is  in  good  faith, 
and  not  to  avoid  the  provisions  of  the  South  Dakota  anti-trust  laws.) 


CHAPTER  XLII. 
SPECIAL   CHARTERS. 


Form  5.— New  York  Charter   (Midvale  Realty). 


CERTIFICATE  OF  INCORPORATION 

of  the 
MIDVALE   REALTY    CORPORATION. 

We,  the  undersigned,  all  being  of  full  age  and  two-thirds  being  citizens 
of  the  United  States  and  one  of  us  a  resident  of  the  State  of  New  York, 
for  the  purpose  of  forming  a  corporation  under  the  Business  Corporations 
Law  of  the  State  of  New  York,  do  hereby  certify  and  set  forth : 

First — The  name  of  said  corporation  shall  be 

"  MIDVALE  REALTY  CORPORATION." 

Second — The  purposes  for  which  said  corporation  is  to  be  formed  are 
as  follows: 

(Purposes  omitted.) 

Third— The  amount  of  capital  stock  of  said  corporation  shall  be  one 
million  dollars  ($1,000,000). 

The  amount  of  capital  with  which  said  corporation  will  begin  business 
is  one  thousand  dollars  ($1,000). 

Fourth — The  number  of  shares  of  which  said  capital  stock  is  to  consist 
shall  be  ten  thousand  (10,000)  shares,  of  the  par  value  of  one  hundred 
dollars  ($100)  each. 

Of  said  capital  stock  five  thousand  (5,000)  shares,  of  the  par  value  of 
five  hundred  thousand  dollars  ($500,000)  shall  be  cumulative  preferred 
stock,  entitled  to  an  annual  dividend  of  six  per  cent.  (6%)  from  the  profits 
of  the  corporation,  payable  semi-annually,  on  the  tenth  days  of  January 
and  July  in  each  year,  before  any  dividends  are  paid  upon  the  common 
stock,  and  to  share  equally  with  the  common  stock  in  any  excess  paid  in 
any  year  above  six  per  cent.  (6%)  to  all  the  stock,  and  in  the  event  of 
liquidation  or  dissolution  from  any  cause  said  preferred  stock  shall  be 
entitled  to  be  paid  in  full  from  the  assets  of  the  corporation*  before  any- 
thing is  paid  to  the  common  stock.  The  holders  of  such  preferred  stock 
shall  not  be  entitled  to  vote  in  any  meeting  of  the  stockholders  or  election 
of  directors,  unless  the  accumulated  dividends  due  and  unpaid  such  pre- 
ferred stock  at  the  time  shall  equal  or  exceed  fifteen  per  cent.  (15%)  of 
the  par  value  of  said  stock. 

Of  said  capital  stock  five  thousand  (5,000)  shares,  of  the  par  value  of 
five  hundred  thousand  dollars  ($500,000)  shall  be  common  stock  of  the 
corporation. 

Fifth — The  principal  business  office  of  said  corporation  shall  be  located 
in  the  Borough  of  Manhattan  and  in  the  City,  County  and  State  of 
New  York. 

297 


298  FORMS   AND    PRECEDENTS. 

Sixth — The  duration  of  said  corporation  shall  be  perpetual. 
Seventh — The  number  of  directors  of  said  corporation  shall  be  five. 
Eighth — The  names  and  post-office  addresses  of  the  directors  of  said 
corporation  for  the  first  year  are  as  follows : 

(Names  and  addresses  of  directors  omitted.) 

Ninth — The  names  and  post-office  addresses  of  the  subscribers  to  this 
certificate,  and  the  number  of  shares  which  each  agrees  to  take  in  said 
corporation  are  as  follows : 

NAMES.  ADDRESSES.  SHARES. 

John  B.  Clark 203  Broadway,  New  York  City I 

Charles  F.  Holbrook Mount  Vernon,  N.  Y I 

Douglas  Raymond 212  Madison  Ave.,  New  York  City I 

Tenth — At  all  elections  of  directors  of  this  corporation  each  stockholder 

shall  be  entitled  to  as  many  votes  as  shall  equal  the  number  of  his  shares 

of  stock,  multiplied  by  the  number  of  directors  to  be  elected,  and  he  may 

cast  all  of  such  votes  for  a  single  director  or  may  distribute  them  among 

the  number  to  be  voted  for,  or  any  two  or  more  of  them,  as  he  may  see  fit. 

In  Witness  Whereof,  we  have  made  and  signed  this  certificate 

in  duplicate  this  I3th  day  of  January,  one  thousand  nine 

hundred  and  eight. 

(Signatures  of  incorporators.) 
(Notarial  acknowledgment  in  due  form.) 


Form  6.— New  Jersey  Charter  (United  States  Steel). 

AMENDED  CERTIFICATE  OF  INCORPORATION 

of 
UNITED   STATES   STEEL   CORPORATION. 


We,  the  undersigned,  in  order  to  form  a  corporation  for  the  purposes 
hereinafter  stated,  under  and  pursuant  to  the  provisions  of  the  Act  of  the 
Legislature  of  the  State  of  New  Jersey,  entitled  "An  Act  Concerning  Corpo- 
rations (Revision  of  1896),"  and  the  acts  amendatory  thereof  and  supple- 
mentary thereto,  do  hereby  certify  as  follows : 

I. — The  name  of  the  corporation  is 

UNITED  STATES  STEEL  CORPORATION." 

II. — The  location  of  its  principal  office  in  the  State  of  New  Jersey  is 
at  No.  51  Newark  street,  in  the  City  of  Hoboken,  County  of  Hudson.  The 
name  of  the  agent  therein  and  in  charge  thereof,  upon  whom  process 
against  the  corporation  may  be  served,  js  Hudson  ^  Trust  Company.  Said 
office  is  to  be  the  registered  office  of  said  corporation. 

III. — The  objects  for  which  the  corporation  is  formed  are : 

To  manufacture  iron,  steel,  manganese,  coke,  copper,  lumber  and 
other  materials,  and  all  or  any  articles  consisting  or  partly  consisting 
of  iron,  steel,  copper,  wood  or  other  materials,  and  all  or  any  products 
thereof. 

To  acquire,  own,  lease,  occupy,  use  or  develop  any  lands  contain- 
ing coal  or  iron,  manganese,  stone  or  other  ores,  or  oil,  and  any 
woodlands,  or  other  lands,  for  any  purpose  of  the  company. 


SPECIAL   CHARTERS.  299 

To  mine  or  otherwise  to  extract  or  remove  coal,  ores,  stone  and 
other  minerals  and  timber  from  any  lands  owned,  acquired,  leased 
or  occupied  by  the  company,  or  from  any  other  lands. 

To  buy  and  sell,  or  otherwise  to  deal  or  to  traffic  in,  iron,  steel, 
manganese,  copper,  stone,  ores,  coal,  coke,  wood,  lumber  and  other 
materials  and  any  of  the  products  thereof,  and  any  articles  consisting 
or  partly  consisting  thereof. 

To  construct  bridges,  buildings,  machinery,  ships,  boats,  engines, 
cars  and  other  equipment,  railroads,  docks,  slips,  elevators,  water 
works,  gas  works  and  electric  works,  viaducts,  aqueducts,  canals 
and  other  waterways,  and  any  other  means  of  transportation,  and 
to  sell  the  same,  or  otherwise  dispose  thereof,  or  to  maintain  and 
operate  the  same,  except  that  the  company  shall  not  maintain  or 
operate  any  railroad  or  canal  in  the  State  of  New  Jersey. 

To  apply  for,  obtain,  register,  purchase,  lease  or  otherwise  to 
acquire,  and  to  hold,  use,  own,  operate  and  introduce,  and  to  sell, 
assign,  or  otherwise  to  dispose  of,  any  trademarks,  trade  names, 
patents,  inventions,  improvements  and  processes  used  in  connection 
with  or  secured  under  letters  patent  of  the  United  States,  or  else- 
where, or  otherwise;  and  to  use,  exercise,  develop,  grant  licenses 
in  respect  of,  or  otherwise  turn  to  account  any  such  trademarks, 
patents,  licenses,  processes  and  the  like,  or  any  such  property  or 
rights. 

To  engage  in  any  other  manufacturing,  mining,  construction  or 
transportation  business  of  any  kind  or  character  whatsoever,  and  to 
that  end  to  acquire,  hold,  own  and  dispose  of  any  and  all  property, 
?ssets,  stocks,  bonds  and  rights  of  any  and  every  kind,  but  not  to 
engage  in  any  business  hereunder  which  shall  require  the  exercise 
of  the  right  of  eminent  domain  within  the  State  of  New  Jersey. 

To  acquire  by  purchase,  subscription  or  otherwise,  and  to  hold 
or  to  dispose  of  stocks,  bonds  or  any  other  obligations  of  any  corpo- 
ration formed  for,  or  then  or  theretofore  engaged  in  or  pursuing  any 
one  or  more  of  the  kinds  of  business,  purposes,  objects  or  operations 
above  indicated,  or  owning  or  holding  any  property  of  any  kind 
herein  mentioned ;  or  of  any  corporation  owning  or  holding  the  stocks 
or  the  obligations  of  any  such  corporation. 

To  hold  for  investment,  or  otherwise  to  use,  sell  or  dispose  of,  any 
stock,  bonds  or  other  obligations  of  any  such  other  corporation;  to 
aid  in  any  manner  any  corporation  whose  stock,  bonds  or  other 
obligations  are  held  or  are  in  any  manner  guaranteed  by  the  com- 
pany, and  to  do  any  other  acts  or  things  for  the  preservation,  protec- 
tion, improvement  or  enhancement  of  the  value  of  any  such  stock, 
bonds  or  other  obligations,  o-r  to  do  any  acts  or  things  designed  for 
any  such  purpose ;  and,  while  owner  of  any  such  stock,  bonds  or 
other  obligations,  to  exercise  all  the  rights,  powers  and  privileges 
of  ownership  thereof,  and  to  exercise  any  and  all  voting  power 
thereon. 

The  business  or  purpose  of  the  company  is  from  time  to  time  to  dp 
any  one  or  more  of  the  acts  and  things  herein  set  forth ;  ^  and  it 
may  conduct  its  business  in  other  States  and  in  the  Territories  and 
in  foreign  countries,  and  may  have  one  office  or  more  than  one  office, 
and  keep  the  books  of  the  company  outside  of  the  State  of  New 
Jersey,  except  as  otherwise  may  be  provided  by  law;  and  may  hold, 
purchase,  mortgage  and  convey  real  and  personal  property  either  in 
or  out  of  the  State  of  New  Jersey. 

Without  in  any  particular  limiting  any  of  the  objects  and  powers 
of  the  corporation,  it  is  hereby  expressly  declared  and  provided  that 
the  corporation  shall  have  power  to  issue  bonds  and  other  obligations 
in  payment  for  property  purchased  or  acquired  by  it,  or  for  any  other 


300  FORMS    AND    PRECEDENTS. 

object  in  or  about  its  business;  to  mortgage  or  pledge  any  stock, 
bonds  or  other  obligations,  or  any  property  which  may  be  acquired 
by  it,  to  secure  any  bonds  or  other  obligations  by  it  issued  or 
incurred ;  to  guarantee  any  dividends  or  bonds  or  contracts  or  other 
obligations ;  to  make  and  perform  contracts  of  any  kind  and  descrip- 
tion ;  and  in  carrying  on  its  business,  or  for  the  purpose  of  attaining 
or  furthering  any  of  its  objects,  to  do  any  and  all  other  acts  and 
things,  and  to  exercise  any  and  all  other  powers  which  a  copartner- 
ship or  natural  person  could  do  and  exercise,  and  which  now  or 
hereafter  may  be  authorized  by  law. 

IV. — The  total  authorized  capital  stock  of  the  corporation  is  eleven 
hundred  million  dollars  ($1,100,000,000),  divided  into  eleven  million  shares 
of  the  par  value  of  one  hundred  dollars  each.  Of  such  total  authorized 
capital  stock  five  million  five  hundred  thousand  shares,  amounting  to  five 
hundred  and  fifty  million  dollars,  shall  be  preferred  stock,  and  five  million 
five  hundred  thousand  shares,  amounting  to  five  hundred  and  fifty  million 
dollars,  shall  be  common  stock. 

From  time  to  time  the  preferred  stock  and  the  common  stock  may  be 
increased  according  to  law,  and  may  be  issued  in  such  amounts  and  propor- 
tions as  shall  be  determined  by  the  Board  of  Directors  and  as  may  be 
permitted  by  law. 

The  holders  of  the  preferred  stock  shall  be  entitled  to  receive,  when  and 
as  declared,  from  the  surplus  or  net  profits  of  the  corporation,  yearly  divi- 
dends at  the  rate  of  seven  per  centum  per  annum  and  no  more,  payable 
quarterly  on  dates  to  be  fixed  by  the  by-laws.  The  dividends  on  the  pre- 
ferred stock  shall  be  cumulative,  and  shall  be  payable  before  any  divi- 
dends on  the  common  stock  shall  be  paid  or  set  apart;  so  that,  if  in  any 
year  dividends  amounting  to  seven  per  cent,  shall  not  have  been  paid 
thereon,  the  deficiency  shall  be  payable  before  any  dividends  shall  be  paid 
upon  or  set  apart  for  the  common  stock. 

Whenever  all  cumulative  dividends  on  the  preferred  stock  for  all 
previous  years  shall  have  been  declared  and  shall  have  become  payable, 
and  the  accrued  quarterly  installments  for  the  current  year  shall  have  been 
declared,  and  the  company  shall  have  paid  such  cumulative  dividends  for 
previous  years  and  such  accrued  quarterly  installments,  or  shall  have  set 
aside  from  its  surplus  or  net  profits  a  sum  sufficient  for  the  payment 
thereof,  the  board  of  directors  may  declare  dividends  on  the  common  stock, 
payable  then  or  thereafter,  out  of  any  remaining  surplus  or  net  profits. 

In  the  event  of  any  liquidation  or  dissolution  or  winding  up  (whether 
voluntary  or  involuntary)  of  the  corporation,  the  holders  of  the  preferred 
stock  shall  be  entitled  to  be  paid  in  full  both  the  par  amount  of  their  shares 
and  the  unpaid  dividends  accrued  thereon  before  any  amount  shall  be  paid 
to  the  holders  of  the  common  stock;  and,  after  the  payment  to  the  holders 
of  the  preferred  stock  of  its  par  value  and  the  unpaid  accrued  dividends 
thereon,  the  remaining  assets  and  funds  shall  be  divided  and  paid  to  the 
holders  of  the  common  stock  according  to  their  respective  shares. 

V.— The  names  and  post-office  addresses  of  the  ^corporators,  and  the 
number  of  shares  of  stock  for  which  severally  and  respectively  we  do 
hereby  subscribe  (the  aggregate  of  our  said  subscriptions,  being  three 
thousand  dollars,  is  the  amount  of  capital  stock  with  which  the  corporation 
will  commence  business),  are  as  follows: 

r-NUMBER  OF  SHARES.—* 
PREFERRED  COMMON 

NAME.  POST-OFFICE  ADDRESS.  STOCK.  STOCK. 

Charles  C.  Cluff 51  Newark  St.,  Hoboken,  N.  J. . .     5  5 

William  J.  Curtis. . .  .51  Newark  St,  Hoboken,  N.  J. . .     5  5 

Charles  MacVeagh  . .  51  Newark  St.,  Hoboken,  N.  J . . .     5  5 

VI.—The  duration  of  the  corporation  shall  be  perpetual. 


SPECIAL    CHARTERS.  301 

VII. — The  number  of  Directors  of  the  company  shall  be  fixed  from  time 
to  time  by  the  by-laws ;  but  the  number,  if  fixed  at  more  than  three,  shall 
be  some  multiple  of  three.  The  Directors  shall  be  classified  with  respect 
to  the  time  for  which  they  shall  severally  hold  office  by  dividing  them  into 
three  classes,  each  consisting  of  one-third  of  the  whole  number  of  the 
Board  of  Directors.  The  Directors  of  the  first  class  shall  be  elected  for  a 
term  of  one  year;  the  Directors  of  the  second  class  for  a  term  of  two 
years,  and  the  Directors  of  the  third  class  for  a  term  of  three  years ;  and 
at  each  annual  election  the  successors  of  the  class  of  Directors  whose  terms 
shall  expire  in  that  year  shall  be  elected  to  hold  office  for  the  term  of 
three  years,  so  that  the  term  of  office  of  one  class  of  Directors  shall  expire 
in  each  year. 

The  number  of  Directors  may  be  increased  as  may  be  provided  in  the 
by-laws.  In  case  of  any  increase  of  the  number  of  the  Directors  the  addi- 
tional Directors  shall  be  elected  as  may  be  provided  in  the  by-laws,  by 
the  Directors  or  by  the  stockholders  at  an  annual  or  special  meeting ;  and 
one-third  of  their  number  shall  be  elected  for  the  then  unexpired  portion 
of  the  term  of  the  Directors  of  the  first  class,  one-third  of  their  number 
for  the  unexpired  portion  of  the  term  of  the  Directors  of  the  second  class, 
and  one-third  of  their  number  for  the  unexpired  portion  of  the  term  of 
Directors  of  the  third  class,  so  that  each  class  of  Directors  shall  be  increased 
equally. 

In  case  of  any  vacancy  in  any  class  of  Directors  through  death,  resig- 
nation, disqualification  or  other  cause,  the  remaining  Directors,  by  affirma- 
tive vote  of  a  majority  of  the  Board  of  Directors,  may  elect  a  successor 
to  hold  office  for  the  unexpired  portion  of  the  term  of  the  Director  whose 
place  shall  be  vacant,  and  until  the  election  of  a  successor. 

The  Board  of  Directors  shall  have  power  to  hold  their  meetings  outside 
of  the  State  of  New  Jersey,  at  such  places  as  from  time  to  time  may  be 
designated  by  the  by-laws  or  by  resolution  of  the  Board.  The  by-laws  may 
prescribe  the  number  of  Directors  necessary  to  constitute  a  quorum  of  the 
Board  of  Directors,  which  number  may  be  less  than  a  majority  of  the  whole 
number  of  the  Directors. 

Unless  authorized  by  votes  given  in  person  or  by  proxy  by  stockholders 
holding  at  least  two-thirds  of  the  capital  stock  of  the  corporation,  which  is 
represented  and  voted  upon  in  person  or  by  proxy  at  a  meeting  specially 
called  for  that  purpose  or  at  an  annual  meeting,  the  Board  of  Directors 
shall  not  mortgage  or  pledge  any  of  its  real  property,  or  any  shares  of  the 
capital  stock  of  any  other  corporation;  but  this  prohibition  shall  not  be 
construed  to  apply  to  the  execution  of  any  purchase-money  mortgage  or 
any  other  purchase-money  lien.  As  authorized  by  the  Act  of  the  Legislature 
of  the  State  of  New  Jersey,  passed  March  22,  1901,  amending  the  I7th 
section  of  the  Act  Concerning  Corporations  (Revision  of  1896),  any  action 
which  theretofore  required  the  consent  of  the  holders  of  two-thirds  of 
the  stock  at  any  meeting  after  notice  to  them  given,  or  required  their 
consent  in  writing  to  be  filed,  may  be  taken  upon  the  consent  of,  and  the 
consent  given  and  filed  by  the  holders  of  two-thirds  of  the  stock  of  each 
class  represented  at  such  meeting  in  person  or  by  proxy. 

Any  officers  elected  or  appointed  by  the  Board  of  Directors  may  be 
removed  at  any  time  by  the  affirmative  vote  of  a  majority  of  the  whole 
Board  of  Directors.  Any  other  officer  or  employee  of  the  company  may 
be  removed  at  any  time  by  vote  of  the  Board  of  Directors,  or  by  any  com- 
mittee or  superior  officer  upon  whom  such  power  of  removal  may  be  con- 
ferred by  the  by-laws  or  by  vote  of  the  Board  of  Directors. 

The  Board  of  Directors,  by  the  affirmative  vote  of  a  majority  of  the 
whole  Board,  may  appoint  from  the  Directors  an  executive  committee,  of 
which  a  majority  shall  constitute  a  quorum;  and  to  such  extent  as  shall 
be  provided  in  the  by-laws,  such  committee  shall  have  and  may  exercise 
all  or  any  of  the  powers  of  the  Board  of  Directors,  including  power  to 


302  FORMS   AND    PRECEDENTS. 

cause  the  seal  of  the  corporation  to  be  affixed  to  all  papers  that  may 
require  it 

The  Board  of  Directors,  by  the  affirmative  vote  of  a  majority  of  the 
whole  Board,  may  appoint  any  other  standing  committees,  and  such  stand- 
ing committees  shall  have  and  may  exercise  such  powers  as  shall  be  con- 
ferred or  authorized  by  the  by-laws. 

*  The  Board  of  Directors  may  appoint  not  only  other  officers  of  the 
company,  but  also  one  or  more  Vice-Presidents,  one  or  more  Assistant 
Treasurers,  and  one  or  more  Assistant  Secretaries ;  and  to  the  extent 
provided  in  the  by-laws  the  persons  so  appointed  respectively  shall  have 
and  may  exercise  all  the  powers  of  the  President,  of  the  Treasurer  and 
of  the  Secretary,  respectively. 

The  Board  of  Directors  shall  have  power  from  time  to  time  to  fix  and 
to  determine  and  to  vary  the  amount  of  the  working  capital  of  the  company ; 
and  to  direct  and  determine  the  use  and  disposition  of  any  surplus  or  net 
profits  over  and  above  the  capital  stock  paid  in;  and  in  its  discretion  the 
Board  of  Directors  may  use  and  apply  any  such  surplus  or  accumulated 
profits  in  purchasing  or  acquiring  its  bonds  or  other  obligations,  or  shares 
of  its  own  capital  stock,  to  such  extent  and  in  such  manner  and  upon  such 
terms  as  the  Board  of  Directors  shall  deem  expedient;  but  shares  of  such 
capital  stock  so  purchased  or  acquired  may  be  resold,  unless  such  shares 
shall  have  been  retired  for  the  purpose  of  decreasing  the  company's  capital 
stock,  as  provided  by  law. 

The  Board  of  Directors  from  time  to  time  shall  determine  whether  and 
to  what  extent,  and  at  what  times  and  places,  and  under  what  conditions 
and  regulations,  the  accounts  and  books  of  the  Corporation,  or  any  of 
them,  shall  be  open  to  the  inspection  of  the  stockholders,  and  no  stock- 
holder shall  have  any  right  to  inspect  any  account  or  book  or  document  of 
the  Corporation,  except  as  conferred  by  statute  or  authorized  by  the  Board 
of  Directors,  or  by  a  resolution  of  the  stockholders. 

Subject  always  to  by-laws  made  by  the  stockholders,  the  Board  of 
Directors  may  make  by-laws,  and,  from  time  to  time  may  alter,  amend 
or  repeal  any  by-laws,  but  any  by-laws  made  by  the  Board  of  Directors 
may  be  altered  or  repealed  by  the  stockholders  at  any  annual  meeting,  or 
at  any  special  meeting,  provided  notice  of  such  proposed  alteration  or 
repeal  be  included  in  the  notice  of  the  meeting. 

In  Witness  Whereof,  we  have  hereunto  set  our  hands  and  seals 
the  23d  day  of  February,  1901. 

CHARLES  C.  CLUFF. 
WILLIAM  J.  CURTIS. 
CHARLES   MACVEAGH. 
Signed,  sealed  and  delivered  in  J 
the  presence  of  ) 

FRANCIS  LYNDE   STETSON. 
VICTOR  MORAWETZ. 

(Acknowledgment. ; 


[L.S.] 

[L.  s. 
[L.S.] 


SPECIAL   CHARTERS. 

Form  7. — New  Jersey  Charter  (Chicago  Subway). 

""CERTIFICATE  OF  INCORPORATION 

of 
CHICAGO    SUBWAY    COMPANY. 


The  undersigned,  for  the  purpose  of  forming  a  corporation  under  and 
pursuant  to  an  Act  of  the  Legislature  of  the  State  of  New  Jersey,  entitled 
"An  Act  concerning  Corporations  (Revision  of  1896),"  and  the  acts 
amendatory  thereof  and  supplemental  thereto,  do  hereby  set  out  and 
certify  as  follows: 

Article  First— The  name  of  the  corporation  is 

"CHICAGO    SUBWAY   COMPANY." 

Article  Second — The  location  of  the  principal  office  of  the  corporation 
in  the  State  of  New  Jersey  is  at  No.  15  Exchange  place,  in  the  City  of 
Jersey  City,  County  of  Hudson,  in  said  State,  which  shall  also  be  its  regis- 
tered office.  And  the  name  of  the  agent  of  said  corporation  in  said  State, 
who  is  in  charge  of  said  principal  office  and  upon  whom  process  against 
this  corporation  may  be  served,  is  the  Corporation  Trust  Company. 

Article  Third — The  objects  for  which  the  corporation  is  formed  are  as 
follows,  viz.: 

To  furnish,  transmit,  convey,  transport  and  deliver  sounds,  signals 
and  intelligence,  packages,  mail  matter,  freight  and  general  merchan- 
dise, power,  heat,  light  and  refrigeration,  by  steam,  water,  air,  elec- 
tricity or  otherwise,  and  to  acquire,  construct,  dispose  of,  hold,  main- 
tain, operate  and  lease  to,  or  rent  from  others,  all  tunnels  and  other 
subways  and  space  therein,  and  all  terminals,  structures,  appliances 
and  other  property,  real  or  personal,  useful  in  carrying  out  any 
lawful  purpose  whatsoever;  to  produce  or  otherwise  acquire  and  to 
furnish  and  distribute  electric  current  or  other  mechanical  power, 
for  light,  heat,  power,  refrigeration,  signaling,  traction  or  other  pur- 
poses, both  public  and  private;  to  operate  a  telephone  exchange  and 
system ;  to  operate  a  system  for  the  delivery  of  parcels  and  messages 
by  messengers,  vehicles,  or  otherwise;  to  carry  on  the  business  of 
storage  and  warehousing  in  all  its  branches ;  to  construct  and  operate 
subways,  tunnels,  pneumatic  tubes,  telephone  systems,  telegraph  lines, 
power  houses,  terminals  and  other  structures  incidental  to  any  of 
the  purposes  herein  enumerated;  to  construct,  control,  lease  and 
operate,  by  electricity  or  other  power,  railways  for  the  transportation 
of  passengers  or  freight;  to  produce,  manufacture  and  to  otherwise 
prepare  and  to  deal  in  and  deal  with  any  materials,  machinery,  ap- 
pliance, supplies  or  products  which  may  be  used  in  or  in  connection 
with  any  of  the  objects  aforesaid;  to  hold,  purchase  or  otherwise 
acquire,  to  sell,  assign,  mortgage,  pledge  or  otherwise  dispose  of  the 
shares  of  the  capital  stock,  bonds  or  other  evidences  of  debt  incurred 
or  created  by  other  corporations,  and  while  the  holder  of  such  stock, 
to  exercise  all  the  rights  and  privileges  of  ownership,  including  the 
right  to  vote  thereon,  to  the  same  extent  as  a  natural  person  might 
or  could  do ;  to  apply  for,  obtain,  register,  lease  or  otherwise  acquire, 
and  to  hold,  use,  operate,  sell,  assign  or  otherwise  dispose  of,  any 
trade-marks,  trade-names,  patents,  inventions,  improvements  and 


*By  courtesy  of  the  Corporation  Trust  Company 


304  FORMS   AND    PRECEDENTS. 

processes  used  in  connection  with  or  secured  under  letters  patent 
of  the  United  States,  or  of  any  other  countries,  or  otherwise;  and 
to  carry  on  any  other  business  whatsoever  which  the  corporation 
may  deem  proper  or  convenient  to  be  carried  on  in  connection  with 
any  of  the  foregoing  purposes,  or  calculated  directly  or  indirectly  to 
promote  the  interests  of  the  corporation  or  to  enhance  the  value 
of  its  property,  and  to  have  and  enjoy  and  exercise  all  the  rights, 
powers  and  privileges  which  are  now  or  which  may  hereafter  be 
conferred  upon  corporations  organized  under  the  act  herein  men- 
tioned; provided,  always,  that  the  corporation  shall  not  construct, 
maintain  or  operate  any  railroad  or  telegraph  or  telephone  lines 
in  the  State  of  New  Jersey,  or  engage  in  any  business  hereunder 
which  shall  require  the  exercise  of  the  right  of  eminent  domain  within 
said  state,  unless  power  in  either  or  any  of  said  respects  shall  here- 
after be  conferred  upon  it  by  law ;  nor  shall  anything  herein  set  forth 
be  construed  to  authorize  or  evidence  the  formation  hereby  of  an 
insurance,  safe  deposit  or  trust  company,  banking  corporation,  sav- 
ings bank  or  other  corporation  deemed  to  possess  any  of  the  powers 
prohibited  to  corporations  formed  under  the  statutory  provisions 
aforesaid. 

The  purpose  of  the  corporation  is  from  time  to  time  to  do  any 
one  or  more  of  the  acts  and  things  herein  set  forth. 

The  corporation  may,  from  time  to  time,  conduct  its  business  in 
other  states  and  in  the  territories,  District  of  Columbia  and  depend- 
encies of  the  United  States,  and  in  foreign  countries;  it  may  have 
an  office  or  offices,  and,  except  as  otherwise  required  by  law,  keep 
its  books,  in  whole  or  in  part,  at  a  point  or  points  outside  of 
the  State  of  New  Jersey;  and  it  may  hold,  purchase,  mortgage  and 
convey  real  and  personal  property  in  any  such  state,  territory,  district, 
dependency  or  foreign  country. 

Without  in  any  particular  limiting  or  restricting  any  of  the  ob- 
jects and  powers  of  the  corporation,  it  is  hereby  expressly  declared 
and  provided  that  the  corporation  shall  have  power  to  issue  bonds 
and  other  obligations  in  payment  for  property  purchased  or  acquired 
by  it,  for  money  borrowed,  or  for  any  other  lawful  object  in  and 
about  its  business;  to  mortgage  or  pledge  any  property  which  may 
be  acquired  by  it;  to  secure  any  bonds,  guarantees  or  other  obliga- 
tions by  it  issued  or  incurred;  to  guarantee  any  dividends,  bonds, 
contracts  or  other  obligations;  to  make  and  perform  contracts  of 
every  kind  and  description ;  and  in  carrying  on  its  business,  or  for 
the  purpose  of  attaining  or  furthering  any  of  its  objects  or  purposes, 
to  do  any  and  all  other  things  and  exercise  any  and  all  other  powers 
which  now  or  hereafter  may  be  permitted  by  law. 

Article  Fourth — The  total  authorized  capital  stock  of  the  corporation 
is  Fifty  Million  Dollars  ($50,000,000) ,  divided  into  Five  Hundred  Thousand 
(500,000)  shares  of  the  par  value  of  One  Hundred  Dollars  ($100)  each. 

Article  Fifth — The  names  and  post-office  addresses  of  the  incorporators, 
and  the  number  of  shares  of  stock  for  which,  severally  and  respectively,  the 
said  incorporators  do  hereby  subscribe  (the  aggregate  of  our  said  sub- 
scriptions being  Five  Thousand  Dollars,  which  is  the  amount  of  capital 
stock  with  which  the  corporation  is  authorized  to  commence  business),  are 
as  follows: 

NO.  OF    TOTAL  PAR 
NAME.  POST-OFFICE  ADDRESS.  SHARES.      VALUE. 

Howard  K.  Wood. .  .15  Exchange  Place,  Jersey  City,  N.  J. .  20  $2,000 

Horace  S.  Gould 15  Exchange  Place,  Jersey  City,  N.  J. .  20  2,000 

Kenneth  K.  McLaren.  15  Exchange  Place,  Jersey  City,  N.  J. .   10  1,000 


SPECIAL    CHARTERS.  305 

Article  Sixth — The  duration  of  the  corporation  shall  be  perpetual. 

Article  Seventh — The  number  of  directors  of  the  corporation  shall  be 
fixed  and  may  be  increased  or  decreased  as  may  be  provided,  from  time  to 
time,  in  the  by-laws.  In  case  of  any  increase  in  the  number  of  directors, 
the  additional  directors  shall  be  elected  as  may  be  provided  in  the  by-laws 
by  the  directors  or  by  the  stockholders  at  an  annual  or  special  meeting. 
The  corporation  shall  have  the  power,  at  any  time,  to  provide  for  the  clas- 
sification of  its  Board  of  Directors  and  to  do  all  things  by  it  deemed  neces- 
sary or  proper  to  accomplish  such  classification.  In  case  of  any  vacancy 
in  the  Board  of  Directors,  the  remaining  directors,  by  an  affirmative  vote  of 
the  majority  of  the  Board  of  Directors,  may  elect  a  successor  to  hold  office 
for  the  unexpired  portion  of  the  term  of  the  director  whose  place  shall 
have  become  vacant  and  until  the  election  of  a  successor. 

The  Board  of  Directors  shall  have  power  to  hold  their  meetings  outside 
of  the  State  of  New  Jersey  at  such  place  or  places  as  may  be  from  time 
to  time  designated  by  the  by-laws  or  by  resolution  of  the  Board  of  Di- 
rectors. 

The  Board  of  Directors,  in  its  discretion,  may  submit  any  contract  for 
the  purchase  or  sale  of  property,  the  sale,  incumbrance  or  other  disposition 
of  shares  of  stock,  bonds  or  other  obligations  to  be  issued  by  the  corpora- 
tion, or  of  any  other  securities,  or  for  the  borrowing  of  money  by  the  cor- 
poration, for  authorization,  approval  or  ratification  at  any  annual  meeting  by 
the  stockholders  or  at  any  meeting  of  the  stockholders  called  for  the  pur- 
pose of  considering  any  such  contract,  and  any  contract  or  act  in  connection 
therewith  that  shall  be  authorized,  approved  or  be  ratified  by  the  vote  of 
the  holders  of  a  majority  in  amount  of  the  capital  stock  of  the  company 
which  is  represented  in  person  or  by  proxy  at  such  meeting  (provided 
that  a  lawful  quorum  of  stockholders  be  there  represented  in  person  or  by 
proxy),  shall  be  as  valid  and  as  binding  upon  the  corporation  and  upon 
all  the  stockholders  as  though  it  had  been  authorized,  approved  and  rati- 
fied by  every  stockholder  of  the  corporation. 

As  authorized  by  the  act  of  the  Legislature  of  the  State  of  New  Jersey, 
passed  March  22,  1901,  amending  the  Seventeenth  Section  of  the  Act  con- 
cerning Corporations  (Revision  of  1896),  any  action  which  theretofore 
required  the  consent  of  the  holders  of  two-thirds  of  the  stock  at  any  meet- 
ing after  notice  having  been  given,  or  required  their  consent  in  writing 
to  be  filed,  may  be  taken,  upon  the  consent  of  and  the  consent  given  and 
filed  by  the  holders  of  two-thirds  of  the  stock  represented  at  such  meeting, 
in  person  or  by  proxy;  provided,  that  the  consent  or  approval  of  a  majority 
or  of  two-thirds  of  the  stock  of  the  corporation  at  the  time  outstanding 
be  not  required  by  the  provisions  hereof,  in  respect  of  some  action  herein 
provided  for. 

Any  officer  elected  or  appointed  by  the  Board  of  Directors  may  be 
removed  at  any  time,  with  or  without  cause,  by  an  affirmative  vote  of  two- 
thirds  of  the  whole  Board  of  Directors.  ^  Any  other  officer  or  employee 
may  be  removed  at  any  time,  with  or  without  cause,  by  the  vote  of  the 
Board  of  Directors,  or  by  any  committee  or  superior  officer  upon  whom 
such  power  of  removal  may  be  conferred  by  the  by-laws,  or  by  a  vote  of 
the  Board  of  Directors. 

The  Board  of  Directors,  by  the  affirmative  vote  of^a  majority  of  the 
whole  board,  may  appoint  from  their  number  an  Executive^  Committee  and 
a  Finance  Committee,  of  each  of  which  committees  a  majority  shall  con- 
stitute a  quorum ;  and  to  such  extent  as  shall  be  provided  in  the  by-laws, 
such  committees  shall  respectively  have  and  may  exercise  all  or  any  of 
the  powers  of  the  Board  of  Directors,  including  the  power  to  cause  the 
seal  of  the  corporation  to  be  affixed  to  all  papers. 

The  Board  of  Directors,  by  the  affirmative  vote  of  a  majority  of  the 
whole  board,  may  appoint  any  other  standing  committees ;  and  such  stand- 


306  FORMS  AND    PRECEDENTS. 

ing  committees  shall  have  and  may  exercise  such  powers  as  may  be  con- 
ferred and  authorized  by  the  by-laws  or  by  the  Board  of  Directors. 

The  Board  of  Directors  may  appoint,  not  only  other  officers  of  the  cor- 
poration, but  also  one  or  more  Vice-Presidents,  one  or  more  Assistant 
Treasurers,  and  one  or  more  Assistant  Secretaries ;  and,  to  the  extent  pro- 
vided in  the  by-laws,  or  by  the  Board  of  Directors,  the  persons  so  appointed, 
respectively,  shall  have  and  may  exercise  all  the  powers  of  the  President 
and  of  the  Treasurer  and  of  the  Secretary,  respectively. 

The  Board  of  Directors  shall  have  power,  from  time  to  time,  to  fix  and 
determine  and  to  vary  the  amount  of  the  working  capital  of  the  corpora- 
tion, and  to  direct  and  determine  the  use  and  disposition  of  any  surplus  or 
net  profits  over  and  above  the  capital  stock  paid  in. 

Except  as  herein  otherwise  provided,  the  Board  of  Directors  shall  have 
power  and  authority  to  sell,  assign,  transfer,  convey  or  otherwise  dispose 
of  all  or  any  of  the  property  and  assets  of  the  corporation  on  such  terms 
and  conditions  as  the  said  Board  of  Directors  shall  deem  just  and  expedi- 
ent, and  to  issue  the  bonds,  debentures,  notes  and  other  obligations  or 
evidences  of  the  debt  of  the  corporation. 

With  the  consent  in  writing,  or  by  vote  at  a  special  meeting  of  the 
stockholders  called  for  the  purpose,  of  the  holders  of  not  less  than  two- 
thirds  of  the  capital  stock  of  the  corporation  at  the  time  outstanding,  the 
directors  of  the  corporation  shall  have  power  to  sell,  convey  or  otherwise 
dispose  of  all  the  property,  rights  and  franchises  of  the  corporation  as  an 
entirety  upon  such  terms  and  conditions,  and  for  such  considerations, 
whether  in  cash,  stocks,  bonds  or  other  property,  as  the  directors  may  in 
their  discretion  determine. 

The  Board  of  Directors,  from  time  to  time,  shall  determine  whether 
and  to  what  extent  and  at  what  times  and  places  and  under  what  conditions 
and  regulations  the  accounts  and  books  of  the  corporation,  or  any  of  them, 
shall  be  open  to  the  inspection  of  the  stockholders;  and  no  stockholder 
shall  have  any  right  to  inspect  any  account  or  book  or  document  of  the 
corporation,  except  as  conferred  by  statute,  or  authorized  by  the  Board  of 
Directors,  or  by  resolution  of  the  stockholders. 

Subject  always  to  by-laws  made  by  the  stockholders,  the  Board  of 
Directors  may  make  by-laws  and,  from  time  to  time,  may  alter,  amend,  or 
repeal  any  by-laws ;  but  any  by-laws  made  by  the  Board  of  Directors  may 
be  altered  or  repealed  by  the  stockholders  at  any  annual  meeting,  or  at 
any  special  meeting,  provided  notice  of  such  proposed  alteration  or  repeal 
be  included  in  the  notice  of  the  meeting. 

In   Witness   Whereof,   we   have   hereunto  set   our   hands  and 
seals  the  i6th  day  of  November,  A.  D.  1904. 

HOWARD  K.  WOOD. 


HORACE  S.  GOULD. 
KENNETH  K.  MCLAREN. 

Signed,  sealed  and  delivered  in  the  presence  of 

HARRY  W.  MEEN. 
(Acknowledgment.) 
(Endorsement  and  Certificate  of  Secretary  of  State.) 


L.  s. 
L.  s. 
L.  s. 


CHAPTER    XLIII. 
BY-LAW    FORMS. 


Form  8. — By-Laws.     Simple  Form. 


BY-LAWS 

of  the 
COLLINGWOOD   TOOL   COMPANY. 

New  York  City. 

ARTICLE  I. — STOCK. 

1.  Certificates  of  Stock  shall  be  issued  to  each  holder  of  full  paid  stock, 
in  numerical  order,  from  the  stock  certificate  book,  be  signed  by  the  Presi- 
dent and  Treasurer  and  sealed  by  the  Secretary  with  the  corporate  seal. 
A  record  of  each  certificate  issued  shall  be  kept  on  the  stub  thereof. 

2.  Transfers  of  Stock  shall  be  made  only  upon  the  books  of  the  Com- 
pany, and  before  a  new  certificate  is  issued  the  old  certificate  must  be 
surrendered  for  cancellation.    The  stock  books  of  the  Company  shall  be 
closed  for  transfers  twenty  days  before  general  elections  and  ten  days 
before  dividend  days. 

3.  The  Treasury  Stock  of  the  Company  shall  consist  of  such  issued 
and  outstanding  stock  of  the  Company  as  may  be  donated  to  the  Company 
or  otherwise  acquired,  and  shall  be  held  subject  to  disposal  by  the  Board 
of  Directors.     Such  stock  shall  neither  vote  nor  participate  in  dividends 
while  held  by  the  Company. 

ARTICLE  II. — STOCKHOLDERS. 

1.  The  Annual  Meeting  of  the  stockholders  of  this  Company  shall  be 
held  in  the  principal  office  of  the  Company,  in  New  York  City,  on  the  second 
Monday  in  January  of  each  year,  at  12  M.,  if  not  a  legal  holiday;  but  if  a 
legal  holiday,  then  on  the  day  following. 

2.  Special  Meetings  of  the  stockholders  may  be  called  at  the  principal 
office  of  the  Company  at  any  time  by  resolution  of  the  Board  of  Directors, 
or  upon  written  request  of  stockholders  holding  one-third  of  the  outstand- 
ing stock. 

3.  Notice  of  Meetings,  written  or  printed,  for  every  regular  or  special 
meeting  of  the  stockholders,  shall  be  prepared  and  mailed  to  the  last  known 
post-office  address  of  each  stockholder  not  less  than  ten  days  before  any 
such  meeting,  and  if  for  a  special  meeting,  such  notice  shall  state  the  object 
or  objects  thereof.    No  failure  of  or  irregularity  of  notice  of  any  regular 
meeting  shall  invalidate  such  meeting  or  any  proceeding  thereat. 

4.  A  Quorum  at  any  meeting  of  the  stockholders  shall  consist  of  a 
majority  of  the  voting  stock  of  the  Company,  represented  in  person  or  by 

307 


FORMS   AND    PRECEDENTS. 

proxy.    A  majority  of  such  quorum  shall  decide  any  question  that  may 
come  before  the  meeting. 

5.  The  Election  of  Directors  shall  be  held  at  the  annual  meeting  of 
stockholders,  and  shall,  after  the  first  election,  be  conducted  by  two  inspec- 
tors of  election,  appointed  by  the  President  for  that  purpose.    The  election 
shall  be  by  ballot,  and  each  stockholder  of  record  shall  be  entitled  to  cast 
one  vote  for  each  share  of  stock  held  by  him. 

6.  The  Order  of  Business  at  the  annual  meeting,  and,  as  far  as  possible, 
at  all  other  meetings  of  the  stockholders,  shall  be : 

1.  Calling  of  Roll. 

2.  Proof  of  due  notice  of  Meeting. 

3.  Reading  and  disposal  of  any  unapproved  Minutes. 

4.  Annual  Reports  of  Officers  and  Committees. 

5.  Election  of  Directors. 

6.  Unfinished  Business. 

7.  New  Business. 

8.  Adjournment. 

ARTICLE  III. — DIRECTORS. 

1.  The  Business  and  Property  of  the  Company  shall  be  managed  by  a 
Board  of  seven  Directors,  who  shall  be  stockholders  and  who  shall  be 
elected  annually  by  ballot  by  the  stockholders  for  the  term  of  one  year, 
and  shall  serve  until  the  election  and  acceptance  of  their  duly  qualified 
successors.    Any  vacancies  may  be  filled  by  the  Board  for  the  unexpired 
term.    Directors  shall  receive  no  compensation  for  their  services. 

2.  The  Regular  Meetings  of  the  Board  of  Directors  shall  be  held  in  the 
principal  office  of  the  Company  in  New  York  City  on  the  third  Tuesday  of 
each  month,  at  3  p.  M.,  if  not  a  legal  holiday;  but  if  a  legal  holiday,  then 
on  the  day  following. 

3.  Special  Meetings  of  the  Board  of  Directors,  to  be  held  in  the  prin- 
cipal office  of  the  Company  in  New  York  City,  may  be  called  at  any  time 
by  the  President,  or  by  any  three  members  of  the  Board,  or  may  be  held 
at  any  time  and  place  without  notice,  by  unanimous  written  consent  of  all 
the  members,  or  by  the  presence  of  all  members  at  such  meeting. 

4.  Notices  of  both  regular  and  special  meetings  shall  be  mailed  by  the 
Secretary  to  each  member  of  the  Board  not  less  than  five  days  before  any 
such  meeting,  and  notices   of  special   meetings  shall   state  the  purposes 
thereof.     No  failure  or  irregularity  of  notice  of  any  regular  meeting  shall 
invalidate  such  meeting  or  any  proceeding  thereat. 

5.  A  Quorum  at  any  meeting  shall  consist  of  a  majority  of  the  entire 
membership  of  the  Board.    A  majority  of  such  quorum  shall  decide  any 
question  that  may  come  before  the  meeting. 

6.  Officers  of  the  Company  shall  be  elected  by  ballot  by  the  Board  of 
Directors  at  their  first  meeting  after  the  election  of  Directors  each  year. 
If  any  office  becomes  vacant  during  the  year,  the  Board  of  Directors  shall 
fill  the  same  for  the  unexpired  term.     The  Board  of  Directors  shall  fix  the 
compensation  of  the  officers  and  agents  of  the  Company. 

7.  The  Order  of  Business  at  any  regular  or  special  meeting  of  the  Board 
of  Directors   shall  be: 

1.  Reading  and  disposal  of  any  unapproved  Minutes. 

2.  Reports  of  Officers  and  Committees. 

3.  Unfinished  Business. 

4.  New  Business. 

5.  Adjournment. 


BY-LAW    FORMS.  309 

ARTICLE  IV.— OFFICERS. 

1.  The  Officers  of  the  Company  shall  be  a  President,  a  Vice-President, 
a  Secretary  and  a  Treasurer,  who  shall  be  elected  for  one  year  and  shall 
hold  office  until  their  successors  are  elected  and  qualify.    The  position  of 
Secretary  and  Treasurer  may  be  united  in  one  person. 

2.  The  President  shall  preside  at  all  meetings,  shall  have  general  super- 
vision of  the  affairs  of  the  Company,  shall  sign  or  countersign  all  certifi- 
cates, contracts  and  other  instruments  of  the  Company  as  authorized  by 
the  Board  of  Directors ;  shall  make  reports  to  the  Directors  and  stock- 
holders and  perform  all  such  other  duties  as  are  incident  to  his  office  or 
are  properly  required  of  him  by  the  Board  of  Directors.    In  the  absence 
or  disability  of  the  President,  the  Vice-President  shall  exercise  all  his 
functions. 

3.  The  Secretary  shall  issue  notices  for  all  meetings,  shall  keep  their 
minutes,  shall  have  charge  of  the  seal  and  the  corporate  book's,  shall  sign, 
with  the  President,  such  instruments  as  require  such  signature,  and  shall 
make  such  reports  and  perform  such  other  duties  as  are  incident  to  his 
office,  or  are  properly  required  of  him  by  the  Board  of  Directors. 

4.  The  Treasurer  shall  have  the  custody  of  all  moneys  and  securities 
of  the  Company  and  shall  keep  regular  books  of  account  and  balance  the 
same  each  month.     He  shall  sign  or  countersign  such  instruments  as  require 
his  signature,  shall  perform  all  duties  incident  to  his  office  or  that  are 
properly  required  of  him  by  the  Board,  and  shall  give  bond  for  the  faithful 
performance  of  his  duties  in  such  sum  and  with  such  sureties  as  may  be 
required  by  the  Board  of  Directors. 

ARTICLE  V. — DIVIDENDS  AND  FINANCE. 

1.  Dividends  shall  be  declared  only  from  the  surplus  profits  at  such 
times  as  the  Board  of  Directors  shall  direct,  and  no  dividend  shall  be 
declared  that  will  impair  the  capital  of  the  Company. 

2.  The  Moneys  of  the  Company  shall  be  deposited  in  the  name  of  the 
Company  in  such  banks  or  trust  companies  as  the  Board  of  Directors  shall 
designate,  and  shall  be  drawn  out  only  by  check  signed  by  the  Treasurer 
and  countersigned  by  the  President. 

ARTICLE  VL— SEAL. 

i.  The  Corporate  Seal  of  the  Company  shall  consist  of  two  concentric 
circles,  between  which  is  the  name  of  the  Company,  and  in  the  centre  shall 
be  inscribed  "  Incorporated  1904,  New  York,"  and  such  seal,  as  impressed 
on  the  margin  hereof,  is  hereby  adopted  as  the  Corporate  Seal  of  the 
Company. 

ARTICLE  VII. — AMENDMENTS. 

1.  These  By-Laws  may  be  amended,  repealed  or  altered,  in  whole  or  in 
part,  by  a  majority  vote  of  the  entire  outstanding  stock  of  the  Company,  at 
any  regular  meeting  of  the  stockholders,  or  at  any  special  meeting  where 
such  action  has  been  announced  in  the  call  and  notice  of  such  meeting. 

2.  The  Board  of  Directors  may  adopt  additional  by-laws  in  harmony 
therewith,  but  shall  not  alter  nor  repeal  any  by-laws  adopted  by  the  stock- 
holders of  the  Company. 


310  FORMS   AND    PRECEDENTS. 

Form  g. — By-Laws.     Extended  Form. 

BY-LAWS 
of  the 

HAMILTON    SILK   MILLS    COMPANY. 
Incorporated  under  the  Laws  of  New  Jersey. 

ARTICLE  I.— STOCK. 
SEC.  i.  Certificates  of  Stock. 

Each  stockholder  of  the  Company  whose  stock  has  been  paid  for  in  full 
shall  be  entitled  to  a  certificate  or  certificates  showing  the  amount  of  stock 
of  the  Company  standing  on  the  books  in  his  name.  Each  certificate  shall 
be  numbered,  bear  the  signatures  of  the  President  and  Treasurer  and  the 
seal  of  the  Company,  and  be  issued  in  numerical  order  from  the  stock 
certificate  book.  A  full  record  of  each  certificate  of  stock,  as  issued,  must 
be  entered  on  the  corresponding  stub  of  the  stock  certificate  book. 

SEC.  2.  Transfers  of  Stock. 

Transfers  of  stock  shall  be  made  upon  the  proper  stock  books  of  the 
Company,  and  must  be  accompanied  by  the  surrender  of  the  duly  endorsed 
certificate  or  certificates  representing  the  transferred  stock.  Surrendered 
certificates  shall  be  cancelled  and  attached  to  the  corresponding  stubs  in 
the  stock  certificate  book  and  new  certificates  issued  to  the  parties  entitled 
thereto.  The  stock  books  shall  be  closed  to  transfers  twenty  days  before 
general  elections  and  twenty  days  before  dividend  days. 

SEC.  3.  Lost  Certificates. 

The  Board  of  Directors  may  order  a  new  certificate  or  certificates  of 
stock  to  be  issued  in  the  place  of  any  certificate  or  certificates  of  the  Com- 
pany alleged  to  have  been  lost  or  destroyed,  but  in  every  such  case  the 
owner  of  the  lost  certificate  or  certificates  shall  first  cause  to  be  given  to 
the  Company  a  bond  in  such  sum,  not  less  than  the  par  value  of  such  lost 
or  destroyed  certificate  or  certificates  of  stock,  as  said  Board  may  direct, 
as  indemnity  against  any  loss  or  claim  that  the  Company  may  incur  by 
reason  of  such  issuance  of  stock  certificates;  but  the  Board  of  Directors 
may,  in  their  discretion,  refuse  to  replace  any  lost  certificate,  save  upon  the 
order  of  some  court  having  jurisdiction  in  such  matter. 

SEC.  4.  Stock  and  Transfer  Books. 

The  stock  and  transfer  books  of  the  Company  shall  be  kept  in  its  prin- 
cipal office,  No.  525  Main  street,  East  Orange,  New  Jersey,  and  shall  be 
open  during  business  hours  to  the  inspection  of  any  stockholder  of  the 
Company.  All  other  books  and  records  of  the  Company  shall  be  kept  in 
its  office  in  New  York  City,  and  shall  include  a  stock  book,  which  shall  be 
open  during  business  hours  to  the  inspection  of  any  stockholder  or  judg- 
ment creditor  of  the  Company. 

SEC.  5.  Preferred  Stock. 

The  capital  stock  of  this  Company  shall  be  One  Hundred  Thousand 
Dollars,  consisting  of  One  Thousand  Shares,  each  of  the  par  value  of  One 
Hundred  Dollars.  Of  these,  Five  Hundred  Shares  shall  be  preferred 
stock,  and  Five  Hundred  Shares  shall  be  common  stock. 


BY-LAW    FORMS.  311 

Said  preferred  stock  shall  receive  from  the  net  earnings  of  the  Com- 
pany a  six  per  cent,  annual  cumulative  dividend  before  any  dividends  are 
paid  upon  the  common  stock,  but  such  stock  shall  not  entitle  the  holders 
thereof  to  vote  at  the  meetings  of  the  stockholders  of  the  Company. 

SEC.  6.  Treasury  Stock. 

All  issued  and  outstanding  stock  of  the  Company  that  may  be  donated 
to  or  be  purchased  by  the  Company  shall  be  treasury  stock,  and  shall  be 
held  subject  to  disposal  by  the  action  of  the  Board  of  Directors.  Such 
stock  shall  neither  vote  nor  participate  in  dividends  while  held  by  the 
Company. 

ARTICLE  II. — STOCKHOLDERS. 
SEC.  i.  Annual  Meetings. 

The  regular  annual  meetings  of  the  stockholders  shall  be  held  in  the 
office  of  the  Company,  at  No.  525  Main  street,  East  Orange,  New  Jersey, 
at  12  M.,  on  the  secqnd  Monday  of  January  in  each  year,  if  not  a  legal 
holiday ;  but  if  a  legal  holiday,  then  on  the  day  following.  At  this  meeting 
the  Directors  for  the  ensuing  year  shall  be  elected,  the  officers  of  the 
Company  shall  present  their  annual  reports,  and  the  Secretary  shall  have 
on  file  for  inspection  and  reference  an  alphabetical  list  of  the  stockholders, 
giving  the  amount  of  stock  held  by  each,  as  shown  by  the  stock  books  of 
the  Company  twenty  days  before  the  date  of  such  annual  meeting. 

SEC.  2.  Special  Meetings. 

Special  meetings  of  the  stockholders  may  be  held  at  any  time,  in  the 
office  of  the  Company,  pursuant  to  a  resolution  of  the  Board  of  Directors, 
or  by  a  call  signed  by  stockholders  holding  a  majority  of  the  voting  stock 
of  the  Company.  Calls  for  special  meetings  shall  specify  the  time,  place 
and  object  or  objects  thereof,  and  no  other  business  than  that  specified  in 
the  call  shall  be  considered  at  any  such  meeting. 

SEC.  3.  Notice  of  Meetings. 

A  written  or  printed  notice  of  every  regular  or  special  meeting  of  the 
stockholders,  stating  the  time  and  place,  and,  in  case  of  special  meetings, 
the  objects  thereof,  shall  be  prepared  and  mailed  by  the  Secretary,  postage 
prepaid,  to  the  last  known  post-office  address  of  each  stockholder,  at  least 
ten  days  before  the  date  of  any  such  meeting.  No  failure  or  irregularity 
of  notice  of  any  regular  meeting  shall  invalidate  the  same  or  any  proceed- 
ing thereat. 

SEC.  4.  Voting. 

Only  stockholders  of  record  shall  be  entitled  to  vote  at  the  regular  and 
special  meetings  of  stockholders.  At  such  meetings  each  stockholder  shall 
be  entitled  to  one  vote  for  each  share  of  stock  held  in  his  name. 

SEC.  5.  Election  of  Directors. 

At  the  first  meeting  of  the  st9ckholders  a  Board  of  seven  Directors  shall 
be  elected,  who  shall  serve  until  the  election  and  acceptance  of  their  duly 
qualified  successors.  Thereafter,  at  each  annual  meeting  of  the  stock- 
holders of  the  Company,  seven  Directors  shall  be  elected,  who  shall  serve 
until  the  election  and  acceptance  of  their  duly  qualified  successors.  All 
elections  for  Directors  shall  be  by  ballot,  and  the  candidates,  to  the  number 
to  be  elected,  receiving  the  highest  number  of  votes,  shall  be  declared 
elected. 

If  for  any  reason  Directors  are  not  elected  at  the  regular  meeting  of 
stockholders,  a  special  meeting  shall  be  called  for  the  purpose  within  thirty 


312  FORMS    AND    PRECEDENTS. 

days  thereafter,  at  which  Directors  shall  be  elected  in  all  respects  as  at 
the  annual  meeting. 

Two  inspectors  of  election  shall  be  appointed  by  the  President  to  con- 
duct the  election  of  Directors  to  serve  for  the  ensuing  year.  These  inspec- 
tors shall  be  sworn  to  the  faithful  discharge  of  their  duty  and  shall  then 
take  charge  of  the  election.  No  person  who  is  a  candidate  for  the  office 
of  Director  shall  act  as  an  inspector  of  election. 

SEC.  6.  Quorum. 

A  majority  of  the  outstanding  stock,  exclusive  of  treasury  stock,  shall 
be  necessary  to  constitute  a  quorum  at  meetings  of  stockholders.  When 
a  quorum  is  present  at  any  meeting,  a  majority  of  the  stock  represented 
thereat  shall  decide  any  question  brought  before  such  meeting.  In  the 
absence  of  a  quorum  those  present  may  adjourn  the  meeting  from  day  to 
day,  but  until  a  quorum  is  secured  may  transact  no  business. 

SEC.  7.  Proxies. 

Any  stockholder  entitled  to  vote  may  be  represented  at  any  regular  or 
special  meeting  of  stockholders  by  a  duly  executed  proxy.  Proxies  shall  be 
in  writing  and  properly  signed,  but  shall  require  no  other  attestation.  No 
proxy  shall  be  recognized  unless  executed  within  eleven  months  of  the 
date  of  the  meeting  at  which  it  is  presented. 

SEC.  8.  Officers  of  Meetings. 

The  President,  if  present,  shall  preside  at  all  meetings  of  the  stock- 
holders. In  his  absence,  the  next  officer  in  due  order  who  may  be  present 
shall  preside.  For  the  purposes  of  these  by-laws,  the  due  order  of  officers 
shall  be  as  follows :  President,  Vice- President  and  Treasurer. 

The  Secretary  of  the  Company  shall  keep  a  faithful  record  of  the  pro- 
ceedings of  all  stockholders'  meetings. 

SEC.  9.  Order  of  Business. 

The  order  of  business  at  the  annual  meeting,  and,  ro  far  as  practicable, 
at  all  other  meetings  of  the  stockholders,  shall  be  as  follows : 

1.  Calling  of  Roll. 

2.  Proof  of  due  notice  of  Meeting. 

3.  Reading  and  disposal  of  any  unapproved  Minutes. 

4.  Annual  Reports  of  Officers  and  Committees. 

5.  Election  of  Directors. 

6.  Unfinished  Business. 

7.  New  Business. 

8.  Adjournment. 

ARTICLE  III. — DIRECTORS. 

SEC.  i.  Number  and  Authority. 

A  Board  of  seven  Directors  shall  be  elected,  who  shall  have  entire 
charge  of  the  property,  interests,  business  and  transactions  of  the  Com- 
pany, with  full  power  and  authority  to  manage  and  conduct  the  same. 

SEC.  2.  Qualifications. 

No  person  shall  be  elected,  nor  shall  be  competent  to  act  as  a  Director 
of  this  Company,  unless  he  is  at  the  time  of  election  the  holder  of  record 
of  at  least  one  share  of  its  stock.  At  least  one  of  the  Directors  of  the 
Company  must  be  resident  in  the  State  of  New  Jersey. 

SEC.  3.  Vacancies. 

Any  vacancy  occurring  in  the  Board  of  Directors  may  be  filled  for 
the  unexpired  term  by  a  majority  vote  of  the  remaining  members.  In 


BY-LAW    FORMS.  318 

event  of  the  membership  of  the  Board  falling  below  the  number  necessary 
for  a  quorum,  a  special  meeting  of  the  stockholders  shall  be  called  and 
such  number  of  Directors  shall  be  elected  thereat  as  may  be  necessary  to 
restore  the  membership  of  the  Board  to  its  full  number. 

SEC.  4.  Regular  Meetings. 

The  regular  meetings  of  the  Board  of  Directors  shall  be  held  in  the 
office  of  the  Company,  in  the  City  of  New  York,  at  3  p.  M.,  on  the  second 
Monday  of  each  month,  if  not  a  legal  holiday;  but  if  a  legal  holiday,  then 
on  the  day  following. 

SEC.  5.  Special  Meetings. 

Special  meetings  of  the  Board  of  Directors  may  be  held  at  any  time, 
in  the  office  of  the  Company,  in  the  City  of  New  York,  on  the  written  call 
of  the  President  or  of  any  three  members  of  the  Board.  Special  meetings 
may  be  held  at  any  time  and  place  and  without  notice,  by  unanimous  con- 
sent of  the  Board. 

SEC.  6.  Notice  of  Meetings. 

The  Secretary  shall  notify  each  member  of  the  Board  of  all  regular 
or  special  meetings,  by  mailing  to  each  member's  last  known  post-office 
address,  postage  prepaid,  at  least  five  days  before  any  such  meeting,  a 
written  or  printed  notice  thereof,  giving  the  time,  place  and,  in  case  of 
special  meetings,  the  objects  thereof,  and  no  other  business  shall  be  con- 
sidered at  any  such  meeting  than  shall  have  been  so  notified  to  the  members. 
No  failure  or  irregularity  of  notice  of  any  regular  meeting  shall  invalidate 
the  same  or  any  proceeding  thereat. 

SEC.  7.  Quorum. 

A  majority  of  the  Board  of  Directors  shall  constitute  a  quorum,  and 
a  majority  of  the  members  in  attendance  at  any  Board  meeting  shall,  in 
the  presence  of  a  quorum,  decide  its  action.  A  minority  of  the  Board 
present  at  any  regular  or  special  meeting  may,  in  the  absence  of  a  quorum, 
adjourn  to  a  later  date,  but  may  not  transact  any  business  until  a  quorum 
has  been  secured. 

SEC.  8.  Election  of  Officers. 

At  the  first  meeting  of  the  Board  of  Directors  after  the  election  of 
Directors  each  year,  a  President,  Vice-President,  Secretary,  Treasurer, 
General  Manager  and  Counsel  shall  be  elected  to  serve  for  the  ensuing  year 
and  until  the  election  of  their  respective  successors.  Election  shall  be  by 
ballot,  and  a  majority  of  the  votes  cast  shall  be  necessary  to  elect.  If  not 
detrimental  to  the  business  or  operations  of  the  Company,  any  two  offices 
may  be  conferred  upon  one  person.  The  Directors  shall  fix  the  compensa- 
tion of  officers,  subject  to  the  limitations  of  the  Charter  and  the  By-Laws. 
Any  vacancies  that  occur  may  be  filled  by  the  Board  for  the  unexpired  term. 
The  Board  shall  have  the  right  to  remove  any  officer  for  cause  by  a  two- 
thirds  vote  of  the  entire  membership  of  the  Board. 

SEC.  9.  Compensation  of  Directors. 

Each  Director  shall  receive  the  sum  of  five  dollars  as  compensation  for 
his  attendance  at  any  regular  or  special  meeting  of  the  Board  of  Directors, 
and  shall  receive  no  other  salary  or  compensation  for  his  services  as  a 
Director  of  the  Company. 

SEC.  10.  Power  to  Pass  By-Laws. 

The  Board  of  Directors  shall  have  no  power  to  amend,  alter  or  repeal 
the  by-laws,  but  may  pass  such  additional  by-laws  in  conformity  therewith 


314  FORMS   AND    PRECEDENTS. 

as  may  be  necessary  or  convenient  to  facilitate  the  business  of  the  Com- 
pany. 

SEC.  ii.  Executive  Committee. 

The  President,  Vice-President  and  Treasurer  shall  together  constitute 
an  Executive  Committee,  which  shall  be  a  part  of  the  permanent  executive 
organization  of  the  Company,  and  shall,  in  the  interim  between  meetings 
of  the  Board  of  Directors,  exercise  all  the  powers  of  that  body,  in  accord- 
ance with  the  general  policy  of  the  Company  and  the  directions  of  the 
Board. 

Meetings  of  the  Executive  Committee  shall  be  held  on  call  of  the  Presi- 
dent, or  of  any  two  members  of  the  Committee.  All  of  the  members  of 
the  Committee  must  be  duly  notified  of  meetings,  and  a  majority  of  the 
members  shall  constitute  a  quorum.  The  Executive  Committee  shall  keep 
due  record  of  all  meetings  and  actions  of  the  Committee,  and  such  records 
shall  at  all  times  be  open  to  the  inspection  of  any  Director. 

SEC.  12.  Corporation  Offices. 

The  principal  office  of  the  Company  within  the  State  of  New  Jersey 
shall  be  at  525  Main  street,  East  Orange,  and  the  agent  therein  and  in 
charge  thereof  upon  whom  process  may  be  served  shall  be  the  Registration 
and  Trust  Company.  An  office  shall  also  be  maintained  in  New  York  City, 
and  such  other  offices  for  the  transaction  of  its  business  shall  be  maintained 
at  such  other  places,  in  or  outside  of  said  State,  as  may  be  determined 
upon  by  the  Board  of  Directors. 

SEC.  13.  Order  of  Business. 

The  regular  order  of  business  at  meetings  of  the  Board  of  Directors 
shall  be  as  follows: 

1.  Reading  and  disposal  of  any  unapproved  Minutes. 

2.  Reports  of  Officers  and  Committees. 

3.  Unfinished  Business. 

4.  New  Business. 

5.  Adjournment. 

ARTICLE  IV.— OFFICERS. 

SEC.  i.  Enumeration,  Election  and  Qualification. 

The  officers  of  the  Company  shall  be  a  President,  Vice-President,  Treas- 
urer, Secretary,  General  Manager  and  Counsel.  These  officers  shall  be 
elected  by  the  Board  of  Directors  at  the  first  regular  meeting  after  the 
election  of  Directors  each  year,  and  shall  hold  office  for  the  term  of  one 
year,  and  until  their  respective  successors  are  duly  elected  and  qualify. 
The  President  and  Vice-President  shall  be  elected  from  among  the  Board 
of  Directors. 

SEC.  2.  The  President. 

The  President,  when  present,  shall  preside  at  all  meetings  of  the  stock- 
holders and  of  the  Board  of  Directors ;  shall  sign  ail  certificates  of  stock ; 
shall  sign  or  countersign,  as  may  be  necessary,  all  such  bills,  notes,  checks, 
contracts  and  other  instruments  as  may  pertain  to  the  ordinary  course  of 
the  Company's  business;  and  sign,  when  duly  authorized  thereto,  all  con- 
tracts, orders,  deeds,  liens,  licenses  and  other  instruments  of  a  special 
nature. 

He  may  also,  in  the  absence  or  disability  of  the  Treasurer,  endorse 
checks,  drafts  and  other  negotiable  instruments  for  deposit  or  collection, 
and  shall,  with  the  Secretary,  sign  the  minutes  of  all  meetings  over  which 
he  may  have  presided. 


BY-LAW    FORMS.  315 

At  the  first  regular  meeting  of  the  Board  in  January  he  shall  submit 
a  complete  report  of  the  operations  of  the  Company  for  the  preceding  year, 
together  with  a  statement  of  the  Company's  affairs  as  existing  at  the  close 
of  such  year,  and  shall  submit  a  similar  report  at  the  annual  meeting  of 
stockholders ;  also  he  shall  report  to  the  Board  of  Directors,  from  time 
to  time,  all  such  matters  coming  within  his  notice  and  relating  to  the 
interests  of  the  Company  as  should  be  brought  to  the  attention  of  the 
Board. 

He  shall  be  ex  oMcio,  a  member  of  all  standing  committees,  shall  have 
such  usual  powers  of  supervision  and  management  as  may  pertain  to  the 
office  of  President,  and  perform  such  other  duties  as  may  be  properly 
required  of  him  by  the  Board  of  Directors. 

SEC.  3.  The  Vice-President. 

The  Vice-President  shall  familiarize  himself  with  the  affairs  of  the 
Company,  and,  in  the  absence,  disability  or  refusal  to  act  of  the  President, 
shall  possess  all  of  the  powers  and  perform  all  of  the  duties  of  that  officer. 

SEC.  4.  The  Secretary. 

The  Secretary  shall  keep  full  minutes  of  all  meetings  of  the  stock- 
holders and  of  the  Board  of  Directors;  shall  read  such  minutes  at  the 
proper  subsequent  meetings;  shall  issue  all  calls  for  meetings  and  notify 
all  officers  and  Directors  of  their  election;  shall  have  charge  of  and  keep 
the  seal  of  the  corporation,  and  affix  the  same  to  certificates  of  stock  when 
such  certificates  are  signed  by  the  President  and  Treasurer,  and  shall  affix 
the  seal,  attested  by  his  signature,  to  such  other  instruments  as  may  require 
the  same. 

He  shall  keep  the  stock  certificate  book  and  the  other  usual  corporation 
books,  and  shall  prepare,  record,  transfer,  issue,  seal  and  cancel  certificates 
of  stock,  as  required  by  the  transactions  of  the  Company  and  its  stock- 
holders. He  shall  also  sign  with  the  President  all  contracts,  deeds,  licenses 
and  other  instruments  when  so  ordered. 

He  shall  make  such  reports  to  the  Board  of  Directors  as  they  "may 
request,  and  shall  also  prepare  such  reports  and  statements  as  are  required 
by  the  State  laws.  He  shall  make  out,  twenty  days  before  any  election 
of  Directors,  a  complete  list  of  the  stockholders  entitled  to  vote  at  such 
election,  arranged  in  alphabetical  order,  and  giving  the  number  of  shares 
of  stock  that  may  be  voted  by  each,  and  shall  keep  the  same  open  to  inspec- 
tion at  the  office  of  the  Company  until  the  time  of  and  during  the  said 
election.  He  shall  allow  any  stockholder,  on  application  in  business  hours, 
to  inspect  the  stock  certificate  books,  the  stock  transfer  book  and  the  stock 
ledger. 

He  shall  attend  to  such  correspondence,  and  to  such  other  duties,  as 
may  be  incidental  to  his  office,  or  properly  be  assigned  him  by  the  Board. 

He  shall  receive  such  salary,  not  exceeding  twelve  hundred  dollars  per 
annum,  as  may  be  fixed  by  the  Board  of  Directors. 

SEC.  5.  The  Treasurer. 

The  Treasurer  shall  have  the  custody  of  and  be  responsible  for  all 
moneys  and  securities  of  the  Company;  shall  keep  full  and  accurate  records 
and  accounts  in  books  belonging  to  the  Company,  showing  the  transactions 
of  the  Company,  its  accounts,  liabilities  and  financial  condition,  and  shall 
see  that  all  expenditures  are  duly  authorized  and  are  evidenced  by  proper 
receipts  and  vouchers.  He  shall  deposit,  in  the  name  of  the  Company,  in 
such  depository  or  depositories  as  are  approved  by  the  Directors,  all  moneys 
that  may  come  into  his  hands  for  the  Company  account.  His  books  and 
accounts  shall  be  open  at  all  times  during  business  hours  to  the  inspection 
of  any  Director  of  the  Company. 


316  FORMS    AND  {PRECEDENTS. 

The  Treasurer  shall  also  endorse  for  collection  or  deposit  all  bills,  notes, 
checks  and  other  negotiable  instruments  of  the  Company;  shall  pay  out 
money  as  may  be  necessary  in  the  transactions  of  the  Company,  either 
by  special  or  general  direction  of  the  Board  of  Directors,  and  on  checks 
signed  by  the  President  and  himself,  and  shall  generally,  together  with 
the  President,  have  supervision  of  the  finances  of  the  Company. 

He  shall  also  make  a  full  report  of  the  financial  condition  of  the  Com- 
pany for  the  annual  meeting  of  the  stockholders,  and  shall  make  such  other 
reports  and  statements  as  may  be  required  of  him  by  the  Board  of  Directors 
or  by  the  laws  of  the  State. 

He  shall  give  bond  in  the  sum  of  five  thousand  dollars,  with  sureties 
satisfactory  to  the  Board  of  Directors,  for  the  faithful  performance  of  his 
duties  and  for  the  restoration  to  the  Company,  in  event  of  his  death, 
resignation  or  removal  from  office,  of  all  books,  papers,  vouchers,  money 
and  other  property  belonging  to  the  Company  that  may  have  come  into  his 
custody.  He  shall  receive  such  compensation,  not  exceeding  eighteen 
hundred  dollars  per  annum,  as  may  be  fixed  by  the  Board  of  Directors. 

SEC.  6.  The  General  Manager. 

The  General  Manager  shall,  under  the  supervision  of  the  Board  of 
Directors  and  the  President,  have  charge  of  and  manage  the  active  business 
operations  of  the  Company.  He  shall  perform  such  further  duties  and 
make  such  reports  as  may  be  required  of  him  by  the  Board  of  Directors, 
and  shall  receive  such  salary,  not  exceeding  twenty-four  hundred  dollars 
per  annum,  as  may  be  fixed  by  the  Board. 

SEC.  7.  Counsel. 

Counsel  of  the  Company  shall  prepare  all  such  contracts  and  agree- 
ments required  in  the  business  of  the  Company  as  may  be  referred  to  him 
by  its  officers,  and  shall  inspect  and  pass  upon  all  such  instruments  pre- 
sented to  the  Company  as  may  be  of  sufficient  importance  to  justify  such 
examination ;  also  he  shall  advise  with  the  officers  of  the  Company  in  all 
such  legal  matters  pertaining  to  the  affairs  of  the  Company  as  may  require 
his  consideration.  He  shall  receive  such  annual  retainer,  not  exceeding 
six  hundred  dollars  per  annum,  as  may  be  fixed  by  the  Board  of  Directors. 

ARTICLE  V.— DIVIDENDS  AND  FINANCES. 
SEC.  i.  Dividends. 

Dividends  shall  be  declared  at  such  times  as  the  Board  may  direct,  but 
no  dividend  shall  be  declared  or  paid  save  from  surplus  profits  remaining 
after  all  current  liabilities  of  the  Company  have  been  fully  paid,  nor  shall 
any  dividend  be  declared  that  would  impair  the  capital  of  the  Company. 

SEC.  2.  Reserve  Fund. 

No  dividend  to  exceed  six  per  cent,  per  annum  shall  be  declared  by 
the  Board  of  Directors  until  there  shall  have  been  accumulated  from 
surplus  profits  a  reserve  fund  of  ten  thousand  dollars,  such  fund  to  be  used 
for  the  extension  or  enlargement  of  the  business  of  the  Company  and  the. 
betterment  of  its  plant,  or  for  such  other  purposes  as  may  be  necessary  or 
advisable. 

SEC.  3.  Debt. 

No  debt  shall  be  contracted,  nor  liability  incurred,  nor  contract  made 
by  or  on  behalf  of  this  Company  in  excess  of  one  thousand  dollars  unless 
the  same  be  authorized  or  directed  by  the  by-laws  or  by  a  duly  recorded 
two-thirds  vote  of  the  entire  Board  of  Directors  at  a  regular  meeting,  or  at 
a  special  meeting  called  for  the  purpose. 


BY-LAW    FORMS.  317 

SEC.  4.  Bank  Deposits. 

The  Treasurer  shall  deposit  the  moneys  of  the  Company,  as  the  same 
may  come  into  his  hands,  in  such  depository  or  depositories  as  may  be 
designated  by  the  Board  of  Directors,  and  such  deposits  shall  be  made  in 
the  name  of  the  Company,  and  moneys  shall  be  withdrawn  therefrom  only 
by  check  signed  by  the  Treasurer  and  countersigned  by  the  President 

ARTICLE  VI.— SUNDRY  PROVISIONS. 
SEC.  i.  Corporate  Seal. 

The  corporate  seal  of  the  Company  shall  consist  of  two  concentric 
circles,  between  which  shall  be  the  name  of  the  Company,  and  in  the  centre 
shall  be  inscribed  "  Incorporated  1905,  New  Jersey,"  and  such  seal,  as 
impressed  on  the  margin  hereof,  is  hereby  adopted  as  the  corporate  seal 
of  the  Company. 

SEC.  2.  Penalties. 

Any  officer,  director  or  stockholder  who  shall  disobey  or  violate  any 
of  the  provisions  of  these  by-laws  shall  be  fined  in  an  amount  not  to  exceed 
twenty  dollars,  such  fine  to  be  imposed  by  the  Board  of  Directors,  and  if 
not  paid  at  the  time,  to  be  deducted  from  any  salary  or  dividend  then  due 
or  that  may  thereafter  become  due  said  person. 

SEC.  3.  Amendment. 

These  by-laws  may  be  amended,  repealed  or  altered,  in  whole  or  in  part, 
at  any  regular  meeting  of  the  stockholders,  or  at  any  special  meeting  where 
such  action  has  been  duly  announced  in  the  call,  provided  that  a  majority 
of  the  entire  voting  stock  of  the  Company  shall  vote  for  such  amendment, 
repeal  or  alteration. 

The  Board  of  Directors  shall  have  no  power  to  amend,  alter  or  repeal 
the  by-laws,  but  may  pass  such  additional  by-laws  in  conformity  therewith 
as  may  be  necessary  or  convenient  to  facilitate  the  business  of  the  Com- 
pany. 


Form  10. — By-Laws.     Comprehensive  Form. 

BY-LAWS 

of  the 

SOUTHERN   TEXTILE  COMPANY. 
Incorporated  under  the  Laws  of  New  Jersey. 

CONTENTS. 
ARTICLE  I.— STOCK. 

Sec.    i.    Certificates  of  Stock. 

2.  Transfers  of  Stock. 

3.  Transfer  Agent  and  Registrar. 

4.  Regulation  of  Transfers. 
Stock  and  Transfer  Books. 
Lost  Certificates. 
Treasury  Stock. 


I: 


318  FORMS   AND    PRECEDENTS. 

ARTICLE  II. — STOCKHOLDERS. 

Sec.    i.  Annual  Meeting. 

2.  Notice  of  Annual  Meeting. 

3.  Special  Meetings. 

4.  Notice  of  Special  Meetings. 

5.  Voting. 

6.  Certified  List  of  Stockholders. 

7.  Proxies. 

8.  Quorum. 

9.  Officers  of  Meetings. 
;    10.  Elections. 

11.  Inspectors  of  Election. 

12.  Order  of  Business. 

ARTICLE  III.— DIRECTORS. 

Sec.    i.  Number  and  Qualifications. 

2.  General  Powers. 

3.  Classification. 

4.  Vacancies. 

5.  Place  of  Meeting. 

6.  Regular  Meetings. 

7.  Notice  of  Regular  Meetings. 

8.  Special  Meetings. 

9.  Notice  of  Special  Meetings. 

10.  Quorum. 

11.  Election  of  Officers. 

12.  Removal  of  Officers. 

13.  Compensation  of  Directors. 

;     14.  Working  Capital  and  Surplus. 

:     15.  Inspection  of  Books. 

"    16.  Order  of  Business. 

ARTICLE  IV.— STANDING  COMMITTEES. 

Sec.    i.  Executive  Committee. 

2.  Powers  of  the  Executive  Committee. 

3.  Officers  of  Executive  Committee. 

4.  Finance  Committee. 

5.  Powers  of  the  Finance  Committee. 

6.  Chairman  of  Finance  Committee. 

7.  Vacancies. 

8.  Procedure. 

ARTICLE  V.— OFFICERS. 

Sec.    i.  Enumeration. 

2.  Qualifications. 

3.  The  President. 

4.  The  Vice-Presidents. 

5.  The  Secretary. 

6.  The  Assistant  Secretary. 

7.  The  Treasurer. 

"      8.  The  Assistant  Treasurer. 

"      9.  The  Auditor. 

10.  The  General  Counsel. 

"    ii.  Delegation  of  Duties. 

ARTICLE  VI.— DIVIDENDS  AND. FINANCES. 

Sec.    i.  Dividends. 

2.  Working  Capital  and  Surplus. 

"      3.  Depositaries. 


BV-LAW    FORMS.  319 

ARTICLE  VII.— SUNDRY  PROVISIONS. 

Sec.    i.     Offices  of  Company. 

2.     Corporate  Seal. 
"      3.     Amendment. 

BY-LAWS. 

ARTICLE  I. — STOCK. 
SEC.  i.  Certificates  of  Stock. 

Each  stockholder  of  the  Company  whose  stock  has  been  paid  for  in  full 
shall  be  entitled  to  a  certificate  or  certificates  prepared  or  approved  by  the 
Board  of  Directors,  showing  the  amount  of  stock  of  the  Company  standing 
on  the  books  in  his  name.  Each  certificate  shall  be  numbered,  bear  the 
signatures  of  the  President  or  Vice-President  and  Treasurer  or  Assistant 
Treasurer  and  the  seal  of  the  Company,  and  be  issued  in  numerical  order 
from  the  stock  certificate  book.  A  full  record  of  each  certificate  of  stock, 
as  issued,  must  be  entered  on  the  corresponding  stub  of  the  stock  certificate 
book. 

SEC.  2.  Transfers  of  Stock. 

Transfers  of  stock  shall  be  made  upon  the  proper  stock  books  of  the 
Company  and  must  be  accompanied  by  the  surrender  of  the  duly  endorsed 
certificate  or  certificates  representing  the  transferred  stock.  Surrendered 
certificates  shall  be  cancelled  and  attached  to  the  corresponding  stubs  in 
the  stock  certificate  book,  and  new  certificates  issued  to  the  parties  entitled 
thereto.  The  stock  books  shall  be  closed  to  transfers  twenty  days  before 
general  elections  and  twenty  days  before  dividend  days. 

SEC.  3.  Transfer  Agent  and  Registrar. 

The  Board  of  Directors  or  the  Finance  Committee  may  appoint  a  Trans- 
fer Agent  and  Registrar  of  Transfers,  and  may  require  all  stock  certificates 
to  bear  the  signature  of  such  appointee. 

SEC.  4.  Regulation  of  Transfers. 

The  Board  of  Directors  and  the  Finance  Committee  shall  have  power 
and  authority  to  make  all  such  further  rules  and  regulations  as  they  may 
respectively  deem  expedient  to  govern  the  issue,  transfer  and  registration 
of  stock  certificates. 

SEC.  5.  Stock  and  Transfer  Books. 

The  stock  and  transfer  books  of  the  Company  shall  be  kept  in  the 
principal  office  of  the  Company,  No.  15  Exchange  place,  in  Jersey  City, 
New  Jersey,  and  shall  be  open  during  business  hours  to  the  inspection  of 
any  stockholder  of  the  Company.  All  other  books  and  records  of  the 
Company  shall  be  kept  in  its  office  in  New  York  City,  and  shall  include 
a  stock  book,  which  shall  be  open  during  business  hours  to  the  inspection 
of  any  stockholder  or  judgment  creditor  of  the  Company. 

SEC.  6.  Lost  Certificates. 

The  Board  of  Directors  may  order  a  new  certificate  or  certificates  of 
stock  to  be  issued  in  the  place  of  any  certificate  or  certificates  of  the  Com- 
pany alleged  to  have  been  lost  or  destroyed,  but  in  every  such  case  the 
owner  of  the  lost  certificate  or  certificates  shall  first  cause  to  be  given  to 
the  Company  a  bond,  with  one  or  more  responsible  sureties,  in  such  sum, 
not  less  than  double  the  par  value  of  such  lost  or  destroyed  certificate  or 
certificates  of  stock,  as  said  Board  may  direct,  as  indemnity  against  any  loss 


820  FORMS    AND    PRECEDENTS. 

or  claim  that  the  Company  may  incur  by  reason  of  such  issuance  of  new 
stock  certificates ;  but  the  Board  of  Directors  may,  in  its  discretion,  refuse 
to  issue  such  new  certificates,  save  upon  the  order  of  some  court  having 
jurisdiction  in  such  matter. 

SEC.  7.  Treasury  Stock. 

All  issued  and  outstanding  stock  of  the  Company  that  may  be  donated 
to  or  purchased  by  the  Company  shall  be  treasury  stock,  and  shall  be  held 
subject  to  disposal  by  the  action  of  the  Board  of  Directors.  Such  stock 
shall  neither  vote  nor  participate  in  dividends  while  held  by  the  Company. 


ARTICLE  II. — STOCKHOLDERS. 

SEC.  i.  Annual  Meeting. 

The  regular  annual  meetings  of  the  stockholders  of  the  Company  shall 
be  held  at  the  principal  office  of  the  Company  in  the  State  of  New  Jersey, 
at  twelve  o'clock  noon  on  the  second  Monday  in  January  of  each  year,  if 
not  a  legal  holiday,  and,  if  a  legal  holiday,  then  on  the  next  succeeding 
Monday  not  a  legal  holiday,  for  the  purpose  of  electing  Directors,  and  for 
the  transaction  of  such  other  business  as  may  be  properly  brought  before 
the  meeting. 

SEC.  2.  Notice  of  Annual  Meeting. 

It  shall  be  the  duty  of  the  Secretary  to  cause  notice  of  the  annual  meet- 
ing to  be  published  once  in  each  of  the  four  calendar  weeks  next  preceding 
such  meeting  in  at  least  one  newspaper  in  New  York  City  and  in  Jersey 
City;  and  a  written  or  printed  notice  of  the  annual  meeting  shall  be 
mailed,  postage  prepaid,  to  each  stockholder  of  record,  not  less  than  ten 
days  before  the  date  of  such  meeting;  but  a  failure  to  publish  or  mail 
such  notice,  or  any  irregularity  in  such  notice,  or  in  the  publication  thereof, 
shall  not  affect  the  validity  of  any  annual  meeting,  or  of  any  of  the  proceed- 
ings at  any  such  meeting. 

SEC.  3.  Special  Meetings. 

<  Special  meetings  of  the  stockholders  may  be  held  at  any  time  in  the 
principal  office  of  the  Company  in  New  Jersey,  by  order  of  the  President, 
or  pursuant  to  a  resolution  of  the  Board  of  Directors,  or  upon  written 
call  signed  by  stockholders  of  record  owning  a  majority  of  the  entire  out- 
standing voting  stock  of  the  Company.  Calls  for  special  meetings  shall 
specify  the  time,  place  and  object  or  objects  thereof,  and  no  other  business 
than  that  specified  in  the  call  shall  be  considered  at  any  such  meeting. 

SEC.  4.  Notice  of  Special  Meeting. 

A  written  or  printed  notice  of  every  special  meeting  of  the  stockholders, 
stating  the  time  and  place  and  the  objects  thereof,  shall  be  prepared  and 
mailed  by  the  Secretary,  postage  prepaid,  to  the  last  known  post-office 
address  of  each  stockholder  of  record  not  less  than  five  days  before  the 
date  of  such  meeting. 

SEC.  5.  Voting. 

At  each  meeting  of  the  stockholders  every  stockholder  shall  be  entitled 
to  vote  in  person  or  by  proxy,  and  he  shall  have  one  vote  for  each  share 
of  stock  standing  in  his  name  on  the  books  of  the  Company  at  the  time 
of  the  closing  of  the  transfer  books  for  such  meeting.  The  votes  for 
Directors,  and,  upon  demand  of  any  stockholder,  the  votes  upon  any 
question  before  the  meeting,  shall  be  by  ballot. 


BY-LAWj  FORMS.  '321 

SEC.  6.  Certified  List  of  Stockholders. 

At  least  ten  days  prior  to  each  regular  meeting  of  the  stockholders  a  full, 
true  and  complete  list,  in  alphabetical  order,  of  all  the  stockholders  entitled 
to  vote  at  such  meeting,  indicating  the  number  of  shares  held  by  each,  shall 
be  prepared  and  certified  by  the  Secretary.  Only  the  persons  in  whose 
names  shares  of  stock  stand  on  the  books  of  the  Company  at  the  time  of 
the  closing  of  the  transfer  books  for  such  meeting  shall  be  evidenced  by  the 
list  of  stockholders  so  furnished  and  be  entitled  to  vote  in  person  or  by 
proxy  at  such  meeting.  Such  list  shall  be  open  to  inspection  by  the  stock- 
holders at  the  principal  office  of  the  Company  during  business  hours  until 
such  election  or  meeting  shall  have  been  held. 

SEC.  7.  Proxies. 

Any  stockholder  entitled  to  vote  at  meetings  of  the  stockholders  may 
be  represented  and  vote  thereat  by  proxy  appointed  by  an  instrument  in 
writing,  subscribed  by  such  stockholder  or  by  his  duly  authorized  attorney, 
and  delivered  to  the  Secretary  at  or  before  the  time  of  such  meeting. 
Proxies  shall  be  properly  signed  and  sealed,  but  shall  require  no  other 
attestation. 

SEC.  8.  Quorum. 

A  majority  in  amount  of  the  stock  issued  and  outstanding,  exclusive  of 
treasury  stock,  represented  by  the  holders  of  record  thereof,  in  person  or 
by  proxy,  shall  be  requisite  to  constitute  a  quorum  at  any  meeting  of  stock- 
holders. When  a  quorum  is  present  at  any  such  meeting,  a  majority  vote 
of  the  stock  represented  thereat  shall  decide  any  matters  brought  before 
such  meeting. 

If  a  quorum  is  not  present  at  the  time  and  place  fixed  by  the  by-laws 
for  the  annual  meeting,  or  fixed  by  notice  as  herein  provided  for  a  duly 
called  special  meeting,  a  majority  in  interest  of  the  stockholders  present 
in  person  or  by  proxy  may  adjourn  from  time  to  time,  without  notice  other 
than  by  announcement  at  the  meeting,  until  a  quorum  is  secured.  At  any 
such  adjourned  meeting  at  which  a  quorum  may  be  present,  any  business 
may  be  transacted  which  might  have  been  transacted  at  the  meeting  as 
originally  called  and  notified. 

SEC.  9.  Officers  of  Meetings. 

Meetings  of  the  stockholders  shall  be  called  to  order  and  presided  over 
by  the  President ;  or,  in  his  absence,  by  one  of  the  Vice-Presidents  in  the 
relative  order  of  position ;  or,  in  the  absence  of  President  and  Vice-Presi- 
dents, the  stockholders  present  may  from  their  number  appoint  a  presiding 
officer  for  that  meeting. 

The  Secretary  of  the  Company  shall  perform  the  duties  of  Secretary 
at  meetings  of  the  stockholders,  but,  in  his  absence  from  any  such  meeting, 
the  presiding  officer  shall  appoint  some  suitable  person  to  act  as  Secretary 
thereat. 

SEC.  10.  Elections. 

The  Directors  of  the  Company,  to  the  number  to  be  elected  each  year, 
shall  be  elected  by  a  plurality  vote,  cast  by  ballot,  at  the  annual  meeting  of 
stockholders  for  that  year.  The  Directors  so  elected  shall  hold  office  until 
the  expiration  of  their  respective  terms  or  until  the  election  and  qualification 
of  their  respective  successors. 

At  all  elections  of  Directors  the  polls  shall  remain  open  for  at  least 
one  hour,  unless  every  stockholder  of  record  has  sooner  voted  in  person 
or  by  proxy,  or  in  writing  has  waived  the  statutory  provision. 


322  FORMS    AND    PRECEDENTS. 

SEC.  ii.  Inspectors  of  Election. 

Every  election  of  Directors  shall  be  conducted  by  three  Inspectors  of 
Election,  appointed  by  the  Board  of  Directors  prior  to  the  time  of  each 
meeting  at  which  any  such  election  is  held;  or,  if  the  Board  fail  to  make 
such  appointment,  then  by  the  presiding  officer  of  such  meeting  prior  to  the 
holding  of  such  election.  Said  Inspectors  shall  be  sworn  to  the  faithful 
discharge  of  their  duties,  shall  open  and  close  the  polls,  pass  upon  all 
questions  as  to  proxies,  receive  and  count  the  ballots,  pass  upon  all  ques- 
tions as  to  the  qualification  of  voters  and  the  acceptance  or  rejection 
of  votes,  and  decide  and  direct  these  and  all  other  matters  directly  pertain- 
ing to  the  election  by  their  majority  action.  If  for  any  reason  any  Inspector 
shall  fail  to  attend  at  the  meeting  for  which  he  was  appointed,  or  shall 
refuse  or  be  unable  to  serve  thereat,  then  the  presiding  officer  of  such 
meeting  shall  appoint  an  Inspector  or  Inspectors  to  fill  the  vacancy  or 
vacancies  so  caused. 

SEC.  12.  Order  of  Business. 

The  order  of  business  at  the  annual  meeting  of  stockholders,  and,  so 
far  as  practicable,  at  all  other  meetings  thereof,  shall  be  as  follows : 

1.  Roll  Call. 

2.  Reading  and  Disposal  of  any  unapproved  Minutes. 

3.  Reports  of  Officers  and  Committees. 

4.  Election  of  Directors. 

5.  Unfinished  Business. 

6.  New  Business. 

ARTICLE  III. — DIRECTORS. 
SEC.  i.  Number  and  Qualifications. 

The  number  of  the  first  Board  of  Directors  shall  be  fifteen  (15),  but  at 
any  time  this  number  may  be  increased  by  by-law  provision  therefor.  No 
person  shall  be  elected,  nor  be  competent  to  act  as  a  Director  of  the  Com- 
pany, unless  a  stockholder  of  record  at  the  time  of  election.  If  any  Direc- 
tor shall  cease  to  be  a  stockholder  of  record  his  term  of  office  shall  forthwith 
determine  and  cease. 

SEC.  2.  General  Powers. 

The  Board  of  Directors  shall  have  entire  charge  of  the  property,  busi- 
ness, interests  and  general  operations  of  the  Company,  with  full  power  and 
authority  to  manage  and  conduct  the  same.  In  addition  thereto  and  to  the 
specific  powers  conferred  on  the  Board  by  the  charter  and  by-laws,  the 
Board  of  Directors  shall  have  general  power  to  do  all  such  things  as  may- 
be necessary  for  the  interests  of  the  Company  and  not  inconsistent  with  the 
State  statutes,  or  the  charter  or  by-laws  of  the  Company. 

SEC.  3.  Classification. 

The  Directors  may  at  their  discretion  divide  the  membership  of  the 
Board  into  three  classes,  each  consisting  of  one-third  of  the  whole  number. 
In  such  case,  the  allotment  of  the  Directors  to  the  different  classes  shall 
be  made  in  such  manner  as  the  Board  may  elect,  and  the  Directors  allotted 
to  the  first  class  shall  hold  office  until  the  annual  election  of  Directors 
following;  the  Directors  of  the  second  class  until  the  second  annual  elec- 
tion of  Directors  following;  and  the  Directors  of  the  third  class  until  the 
third  annual  election  of  Directors  following;  and  at  each  annual  election 
the  successors  to  each  class  of  Directors  whose  terms  expire  in  that  year 
shall  be  elected  to  hold  office  for  three  years,  so  that  the  term  of  office  of 
one  class  of  Directors  shall  expire  in  each  year.  In  event  of  any  increase 
«f  the  number  of  Directors,  one-third  of  the  additional  Directors  shall  be 


BY-LAW    FORMS.  328 

elected  for  the  then  unexpired  portion  of  the  term  of  the  Directors  of  the 
first  class ;  one-third  for  the  unexpired  portion  of  the  term  of  the  Directors 
of  the  second  class;  and  one-third  for  the  unexpired  portion  of  the  term 
of  the  Directors  of  the  third  class,  so  that  each  class  of  Directors  shall  be 
increased  equally. 

SEC.  4.  Vacancies. 

In  case  of  any  vacancy  in  any  class  of  Directors  through  death,  resigna- 
tion, disqualification  or  other  cause,  the  remaining  Directors,  by  affirmative 
vote  of  a  majority  of  the  Board  of  Directors,  may  elect  a  successor  to  hold 
office  for  the  unexpired  portion  of  the  term  of  the  Director  whose  place 
shall  be  vacant,  and  until  the  election  of  a  successor  by  the  stockholders 
of  the  Company. 

In  case  of  any  increase  in  the  Board  of  Directors  between  the  annual 
elections  of  Directors,  the  newly  created  directorships  shall  be  considered 
as  vacancies  and  shall  be  filled  forthwith  by  the  Board. 

Should  the  membership  of  the  Board  of  Directors  at  any  time  fall  below 
the  number  necessary  to  constitute  a  quorum,  then  a  special  meeting  of  the 
stockholders  shall  be  called  by  the  President  and  such  number  of  Directors 
shall  be  elected  thereat  as  may  be  necessary  to  restore  the  Board  to  its  full 
membership. 

SEC.  5.  Place  of  Meeting. 

Meetings  of  the  Board  of  Directors  shall  be  held  in  the  office  of  the 
Company  in  New  York  City,  unless  with  the  written  consent  of  the  entire 
membership  of  the  Board,  in  which  case  meetings  may  be  held  at  any  place 
so  determined. 

SEC.  6.  Regular  Meetings. 

Regular  meetings  of  the  Board  shall  be  held  monthly,  at  3  P.  M.  on  the 
first  Tuesday  of  each  month,  if  not  a  legal  holiday;  otherwise  on  the  next 
succeeding  Tuesday  not  a  legal  holiday,  at  the  same  hour. 

SEC.  7.  Notice  of  Regular  Meetings. 

The  Secretary  shall  mail  notices  of  every  regular  meeting  to  the  last 
known  post-office  address  of  each  Director  at  least  five  days  before  such 
meeting,  and  such  notices  shall  give  the  time  and  place  of  such  meeting; 
but  no  failure  of  such  notice  or  irregularity  therein  shall  affect  the  validity 
of  any  regular  meeting  or  of  any  of  the  proceedings  thereof. 

SEC.  8.  Special  Meetings. 

Special  meetings  of  the  Board  of  Directors  may  be  held  at  any  time 
on  call  of  the  President,  or  on  written  call  of  not  less  than  one-third  of 
the  Directors  at  that  time  in  office,  or  may  be  held  at  any  time  and  place, 
and  without  notice,  by  the  unanimous  written  consent  of  the  Board.  Such 
calls  or  consent  shall  specify  the  time,  place  and  object  or  objects  of  the 
meeting. 

SEC.  9.  Notice  of  Special  Meetings. 

Notice  of  every  special  meeting  other  than  by  unanimous  written  con- 
sent shall  be  mailed  to  each  Director  not  less  than  five  days  before  such 
meeting,  or  be  telegraphed  not  less  than  three  days  before,  and  such  notice 
shall  give  the  time,  place  and  objects  of  such  special  meeting,  and  no  other 
business  shall  be  transacted  thereat  than  shall  have  been  so  notified  to  the 
Directors. 

SEC.  10.  Quorum. 

A  majority  of  the  Board  of  Directors  shall  constitute  a  quorum  for  the 
transaction  of  business,  and,  in  the  presence  of  a  quorum,  a  majority  vote 


324  FORMS    AND    PRECEDENTS. 

of  the  members  present  at  any  Board  meeting  shall  decide  its  action.  In 
the  absence  of  a  quorum  at  any  meeting  of  the  Board,  a  majority  of  those 
present  may  adjourn  the  meeting  from  time  to  time,  but  may  transact  no 
other  business  until  a  quorum  is  secured. 

SEC.  n.  Election  of  Officers. 

At  the  first  regular  meeting  of  the  Board  of  Directors  after  the  time 
fixed  for  the  annual  meeting  of  stockholders  each  year,  or  at  a  special 
meeting  called  for  the  purpose,  but  after  the  time  for  the  annual  meeting 
of  stockholders,  the  Board  shall  elect,  by  ballot,  from  their  number,  a  Presi- 
dent, who  shall  also  be  Chairman  of  the  Executive  Committee;  one  or 
more  Vice-Presidents,  a  Chairman  of  the  Finance  Committee,  a  Secretary, 
an  Assistant  Secretary,  a  Treasurer,  an  Assistant  Treasurer,  an  Auditor, 
a  General  Counsel,  and  the  elective  members  of  the  Executive  and  Finance 
Committees.  The  Board  shall  also  elect  such  other  officers  as  may,  in  the 
discretion  of  the  Board,  be  deemed  necessary.  The  Board  shall  fix  the 
compensation  of  officers  and  may  fill  any  vacancies  among  the  officers  for 
the  unexpired  term. 

SEC.  12,  Removal  of  Officers. 

Any  officer,  agent  or  employee  of  the  Company  shall  be  subject  to 
removal  at  any  time,  with  or  without  cause,  by  the  affirmative  vote  of  a 
majority  of  the  whole  Board  of  Directors. 

SEC.  13.  Compensation  of  Directors. 

Directors  and  members  of  the  Executive  and  Finance  Committees,  as 
such,  shall  receive  no  stated  salaries  for  their  services,  but  shall  be  allowed 
ten  dollars  each  for  attendance  at  either  regular  or  special  meetings  if 
present  at  roll  call  and  thereafter  until  adjournment,  or  until  sooner 
excused.  Directors  residing  outside  the  City  of  New  York  shall,  in  addi- 
tion, receive  their  actual  traveling  expenses. 

SEC.  14.  Working  Capital  and  Surplus. 

The  Directors  shall  have  power  from  time  to  time  to  fix  and  determine 
and  to  vary  the  amount  of  the  working  capital  of  the  Company,  and  to 
direct  and  determine  the  use  and  disposition  of  any  surplus  or  net  profits 
over  and  above  the  paid-in  capital  stock;  and,  in  its  discretion,  the  Board 
of  Directors  may  use  and  apply  any  such  surplus  or  accumulated  profits 
in  purch:. -.ing  or  acquiring  the  Company's  bonds  or  other  obligations  or 
shares  of  its  own  capital  stock,  to  such  extent  and  in  such  manner  and 
upon  such  terms  as  the  Board  of  Directors  shall  deem  expedient;  but 
shares  of  such  capital  stock  so  purchased  or  acquired  may  be  resold  unless 
such  shares  shall  have  been  retired,  as  provided  by  law,  for  the  purpose  of 
decreasing  the  Company's  capital  stock. 

SEC.  15.  Inspection  of  Books. 

The  Board  of  Directors  shall  determine  the  conditions  and  regulations 
under  which  the  books  and  accounts  of  the  Company,  or  any  of  them,  shall 
be  open  to  the  inspection  of  stockholders  of  the  Company;  but  no  such 
books  and  accounts,  except  the  stock  and  transfer  books,  shall  be  open  to 
the  inspection  of  any  stockholder  holding  less  than  five  hundred  shares  of 
the  Company's  stock. 

SEC.  16.  Order  of  Business. 

The  regular  order  of  business  at  meetings  of  the  Board  of  Directors 
shall  be  as  follows : 

1.  Pending  and  Disposal  of  unapproved  Minutes. 

2.  Reports  of  Officers  of  the  Company. 

3.  Report  of  Executive  Committee. 


BY-LAW  FORMS.  325 

4.  Report  of  Finance  Committee. 

5.  Unfinished  Business. 

6.  New  Business. 

7.  Adjournment. 

ARTICLE  IV. — STANDING  COMMITTEES. 
SEC.  i.  Executive  Committee. 

There  shall  be  an  Executive  Committee  of  five  or  more  members,  as 
may  be  determined  by  the  Board  of  Directors,  consisting  of  the  President 
of  the  Company,  the  Chairman  of  the  Finance  Committee,  and  three  or 
more  other  members,  to  be  chosen  annually  by  ballot  by  the  Board  of 
Directors  from  their  own  number,  at  the  first  meeting  of  the  Board  after 
the  annual  meeting  of  the  stockholders,  or  as  soon  thereafter  as  may  be 
convenient.  A  majority  of  the  whole  number  of  Directors  shall  be  neces- 
sary for  an  election,  and  the  members  so  elected  shall  hold  office  for  the 
ensuing  year  and  until  their  successors  are  elected,  unless  sooner  removed 
by  action  of  the  Directors.  The  elected  members  of  the  Executive  Com- 
mittee may  be  removed  at  any  time  by  a  majority  vote  of  the  whole  number 
of  Directors. 

SEC.  2.  Powers  of  the  Executive  Committee. 

The  Executive  Committee  shall  have  and  exercise,  by  action  of  a 
majority  of  all  its  members,  all  the  powers  and  duties  of  the  Board  of 
Directors  when  the  latter  is  not  in  session,  save  and  except  as  limited  by 
the  by-laws,  and  in  such  matters  as  have  been  delegated  to  the  Finance 
Committee,  or  in  which  specific  instructions  have  previously  been  given 
by  the  Board  of  Directors. 

The  Executive  Committee  shall  fix  the  salaries  and  compensation  to 
be  paid  to  all  agents  and  employees  of  the  Company,  except  where  other- 
wise provided  in  the  by-laws  or  by  resolution  of  the  Board  of  Directors. 

The  Executive  Committee  shall  have  power  to  order  the  seal  of  the 
corporation  to  be  affixed  to  all  papers  which  in  their  judgment  may  require 
the  same. 

The  Executive  Committee  shall  not  increase,  enlarge  or  extend  the 
plants  or  operations  of  the  Company  except  with  the  express  approval  of 
the  Finance  Committee. 

The  Executive  Committee  shall  not  have  power  to  purchase  or  contract 
for  any  large  or  unusual  quantities  of  supplies  or  materials  except  with  the 
written  approval  of  the  Finance  Committee. 

The  Executive  Committee  shall  keep  a  record  of  its  proceedings,  and 
the  same,  duly  certified  by  the  Secretary,  shall  be  read  at  the  next  meeting 
of  the  Board  of  Directors. 

SEC.  3.'  Officers  of  Executive  Committee. 

The  President  of  the  Company  shall  be  ex  officio.  a  member  and  Chair- 
man of  the  Executive  Committee,  and  shall  preside  at  all  meetings  of  the 
same. 

The  Chairman  of  the  Finance  Committee  shall  be  ex  officio  a  member 
of  the  Executive  Committee,  and  in  the  absence  of  the  Chairman  shall 
preside  at  all  meetings  of  the  same. 

The  Secretary  of  the  Company  shall  act  as  Secretary  of  the  Executive 
Committee  and  shall  call  meetings  of  ^the  said  committee  on  the  written 
request  of  the  President,  or  of  the  Chairman  of  the  Finance  Committee,  or 
of  any  two  of  the  members  of  the  Executive  Committee. 

SEC.  4.  Finance  Committee. 

There  shall  be  a  Finance  Committee  of  three  or  more  members,  as  may 
be  determined  by  the  Board  of  Directors,  consisting  of  the  President  of  the 


336  FORMS    AND    PRECEDENTS. 

Company  and  of  two  or  more  other  members,  to  be  chosen  annually,  by 
ballot,  by  the  Board  of  Directors,  from  their  own  number,  at  the  first 
meeting  of  the  Board  after  the  annual  meeting  of  the  stockholders,  or  as 
soon  thereafter  as  may  be  convenient.  A  majority  of  the  whole  number 
of  Directors  shall  be  necessary  for  an  election,  and  the  members  so  elected 
shall  hold  office  fof  the  ensuing  year  and  until  their  successors  are  elected. 
The  Board  of  Directors  shall  designate  one  of  said  elected  members  to  be 
the  Chairman  of  the  Finance  Committee,  and  the  Chairman  so  appointed 
shall  preside  over  the  meetings  of  that  committee. 

SEC.  5.  Powers  of  the  Finance  Committee. 

The  Finance  Committee  shall  have  general  and  special  charge  and 
control  of  all  financial  affairs  of  the  Company,  and  shall  have  and  exercise 
all  of  the  powers  of  the  Board  of  Directors  in  such  financial  matters  when 
the  latter  is  not  in  session.  The  Treasurer  and  the  Auditor  of  the  Com- 
pany shall  be  under  the  direct  control  and  supervision  of  the  Finance 
Committee. 

The  Finance  Committee  shall  fix  all  salaries  and  compensation  paid  or 
payable  to  officials  of  the  Company,  except  as  otherwise  provided  in  these 
by-laws  or  fixed  by  resolution  of  the  Board  of  Directors. 

SEC.  6.  Chairman  of  Finance  Committee. 

The  Board  of  Directors  shall  designate  the  Chairman  of  the  Finance 
Committee,  who  shall  preside  over  the  meetings  of  that  committee,  and  shall 
be  ex  officio  a  member  of  the  Executive  Committee.  The  Chairman  of  the 
Finance  Committee  shall  be  charged  with  the  general  oversight,  care  and 
management  of  the  finances  and  financial  affairs  of  the  Company,  except 
as  otherwise  prescribed  in  these  by-laws,  by  the  Board  of  Directors,  or  by 
the  Finance  Committee. 

SEC.  7.  Vacancies. 

All  vacancies  in  either  of  the  standing  committees  shall  be  filled  for  the 
unexpired  term  by  the  remaining  members  of  such  committee,  subject  to 
the  approval  of  the  Board  of  Directors  at  its  next  meeting. 

SEC.  8.  Procedure. 

The  standing  committees  shall  fix  their  respective  regulations  and  rules 
of  procedure,  and  shall  meet  where  and  as  provided  by  such  rules,  or  as 
provided  by  the  resolution  of  the  Board  of  Directors ;  but  at  every  meeting 
a  majority  of  the  whole  committee  shall  be  necessary  to  constitute  a 
quorum,  and  the  affirmative  vote  of  a  majority  of  the  whole  committee 
shall  be  necessary  for  the  adoption  of  any  resolution  or  course  of  action. 
Full  minutes  of  the  proceedings  at  committee  meetings  shall  be  kept,  and 
reports  made  to  the  Board  of  Directors  when  requested. 

ARTICLE  V. — OFFICERS. 
SEC.  I.  Enumeration. 

The  executive  officers  of  the  Company  shall  be  a  President,  one  or  more 
Vice-Presidents,  a  Chairman  of  Finance  Committee,  a  Secretary,  a  Treas- 
urer, an  Auditor,  a  General  Counsel,  and  such  other  officers  as  may  from 
time  to  time  be  elected  by  the  Board  of  Directors. 

The  Board  of  Directors,  or  the  Finance  Committee,  may  appoint  an 
Assistant  Secretary  or  more  than  one  Assistant  Secretary.  Each  Assistant 
Secretary  shall  have  such  powers  and  perform  such  duties  as  may  be 
assigned  to  him  by  the  Board  of  Directors,  or  by  the  Finance  Committee. 

The  Board  of  Directors,  or  the  Finance  Committee,  may  appoint  an 
Assistant  Treasurer,  or  more  than  one  Assistant  Treasurer.  Each  Assistant 


BY-LAW    FORMS.  327 

Treasurer   shall  have  such  powers  and  perform  such  duties  as  may  be 
assigned  to  him  by  the  Board  of  Directors,  or  by  the  Finance  Committee. 

SEC.  2.  Qualifications. 

The  President,  Chairman  of  Finance  Committee  and  any  Vice-Presi- 
dents elected  shall  be  members  of  the  Board  of  Directors.  The  other 
officers  may  or  may  not  be  members  of  the  Board  of  Directors,  at  the 
discretion  of  the  Board. 

SEC.  3.  The  President. 

The  President  shall  be  the  chief  executive  ^  officer  of  the  Company  and 
shall  exercise  general  supervision  and  administration  over  all  its  affairs. 
He  shall  when  present  preside  at  all  meetings  of  the  stockholders  and  Board 
of  Directors,  and  shall  appoint  all  special  or  other  committees,  save  and 
except  the  Executive  and  Finance  Committees,  unless  otherwise  ordered 
by  the  Board  of  Directors.  He  shall,  by  virtue  of  his  office,  be  a  member 
and  Chairman  of  the  Executive  Committee  and  a  member  of  the  Finance 
Committee.  He  shall  sign  and  execute  all  authorized  bonds,  contracts, 
agreements  and  other  obligations  in  the  name  of  the  Company,  and  shall, 
with  the  Treasurer  or  an  Assistant  Treasurer,  sign  all  certificates  of  shares 
in  the  capital  stock  of  the  Company. 

He  shall  submit  a  complete  report  of  the  operations  of  the  Company 
for  the  year,  and  a  statement  of  its  affairs  as  of  the  3ist  day  of  December 
preceding,  to  the  Directors  at  their  first  meeting  in  February,  and  to  the 
stockholders  at  their  annual  meeting,  each  year,  and  from  time  to  time  shall 
report  to  the  Board  all  matters  within  his  knowledge  which  the  interests 
of  the  Company  may  require  to  be  brought  to  their  notice. 

He  shall  be  ex  officio  a  member  of  all  committees,  and  shall  have  the 
general  powers  and  duties  of  supervision  and  management  usually  vested 
in  the  president  of  a  corporation. 

He  shall,  as  far  as  may  be  possible  and  desirable,  familiarize  himself 
with  and  exercise  supervision  over  the  affairs  of  any  other  corporations 
in  which  this  corporation  may  be  interested. 

He  shall  freely  consult  and  advise  with  the  various  committees  and 
their  Chairmen  in  regard  to  the  business  and  interests  of  the  corporation. 

SEC.  4.  The  Vice-Presidents. 

The  Vice- Presidents  of  the  Company  shall  respectively,  in  the  absence 
of  the  President,  in  order  of  their  rank,  be  vested  with  all  the  powers  of 
the  President  and  be  required  to  perform  all  his  duties.  They  shall  per- 
form such  other  duties  proper  to  their  positions  as  may  be  prescribed  by 
the  Board  of  Directors. 

SEC.  5.  The  Secretary. 

The  Secretary  shall  be  sworn  to  the  faithful  discharge  of  his  duties, 
shall  keep  full  minutes  of  all  meetings  of  the  stockholders  and  Board  of 
Directors,  and  shall  perform  the  same  duty  for  the  Standing  Committees 
when  required;  he  shall  give  due  notice  of  all  meetings  of  stockholders 
and  Directors,  and  shall  notify  all  newly  elected  Directors  and  officers  of 
their  election ;  he  shall  have  charge  of  the  seal  of  the  corporation  and  affix 
the  same  to  certificates  of  stock  when  such  certificates  are  duly  signed  by 
the  proper  officers,  and  shall  affix  the  seal,  attested  by  his  signature,  to 
such  other  instruments  as  are  duly  authorized  by  the  Board  of  Directors, 
the  Executive  Committee  or  the  Finance  Committee. 

He  shall  have  charge  of  the  stock  certificate  books,  the  stock  transfer 
books  and  stock  ledgers,  and  such  other  books  and  papers  as  the  Board  of 
Directors  may  place  in  his  care. 

He  shall  make  such  reports  to  the  Board  of  Directors  and  to  the  Execu- 
tive and  Finance  Committees  as  may  be  required  of  him,  and  shall  prepare, 


328  FORMS    AND    PRECEDENTS. 

or  have  prepared,  such  reports  and  statements  as  are  required  by  the  State 
laws.  He  shall  also  make  out,  twenty  days  before  any  election  of  Directors 
by  the  stockholders  of  the  Company,  a  complete  list  of  the  stockholders 
entitled  to  vote  at  such  election,  arranged  in  alphabetical  order,  and  giving 
the  number  of  shares  of  stock  that  may  be  voted  by  each  at  such  election, 
and  he  shall  keep  said  list  open  to  inspection  at  the  office  of  the  Company 
until  the  time  of  and  during  the  said  election. 

He  shall  perform  all  such  other  duties  as  are  incident  to  his  office  or 
may  be  assigned  him  by  the  Board  of  Directors,  the  Executive  Committee 
or  the  Finance  Committee. 

SEC.  6.  The  Assistant  Secretary. 

The  Assistant  Secretary,  when  appointed,  shall,  in  the  absence,  the 
inability,  the  neglect  or  refusal  to  act  of  the  Secretary,  be  vested  with  all 
the  powers  and  be  required  to  perform  all  the  duties  of  that  official.  At 
other  times  he  shall  assist  the  Secretary  in  the  discharge  of  his  duties,  and 
shall  do  such  other  things  incidental  to  the  position  of  Assistant  Secretary 
as  may  be  directed  by  the  Board  of  Directors  or  either  of  the  standing 
committees. 

SEC.  7.  The  Treasurer. 

The  Treasurer  shall  be  the  custodian  of  the  funds  and  securities  of  the 
Company,  except  as  otherwise  directed  by  the  Board  of  Directors,  and 
shall  be  responsible  for  all  moneys  and  other  property  of  the  Company 
under  his  charge ;  he  shall  keep  full  and  accurate  records  and  accounts,  in 
books  belonging  to  the  Company,  of  all  receipts,  disbursements,  credits, 
assets,  liabilities  and  general  financial  transactions  of  the  Company ;  he  shall 
deposit  all  moneys  and  other  valuable  effects  of  the  Company  coming  into 
his  hands  in  such  depositaries  as  may  be  designated  by  the  Board  of 
Directors  or  by  the  Finance  Committee.  His  books  and  accounts  shall  be 
open  at  all  times  during  business  hours  to  the  inspection  of  any  Directors 
of  the  Company. 

He  shall  disburse  the  funds  of  the  Company  as  may  be  ordered  by  the 
specific  or  general  instructions  of  the  Board  of  Directors  or  the  Finance 
Committee,  taking  proper  vouchers  for  all  such  disbursements ;  he  shall 
endorse  for  collection  or  deposit  all  bills,  notes,  checks  and  other  negotiable 
instruments  of  the  Company,  and  deposit  the  same  to  the  Company's  credit ; 
he  shall  sign  all  receipts  and  vouchers  for  payments  made  the  Company, 
and  shall,  jointly  with  such  other  officer  as  may  be  designated  by  the 
Finance  Committee,  sign  all  checks  made  by  the  Company;  he  shall  sign, 
with  the  President,  or  with  such  other  person  or  persons  as  may  be  desig- 
nated for  the  purpose  by  the  Board  of  Directors  or  Finance  Committee, 
all  bills  of  exchange,  promissory  notes  and  bonds  of  the  Company,  and 
shall  sign  with  the  President,  or  with  a  duly  authorized  Vice-President, 
all  certificates  of  shares  of  the  Company's  capital  stock. 

He  shall  give  bond  to  the  Company  in  such  sum,  and  with  such  sureties, 
and  in  such  form,  as  shall  be  satisfactory  to  the  Finance  Committee,  for 
the  faithful  performance  of  the  duties  of  his  office,  and  for  the  restoration 
to  the  Company,  in  the  event  of  his  death,  resignation  or  removal  from 
office,  of  all  books,  papers,  vouchers,  money  and  other  property  of  whatever 
kind  in  his  custody  and  belonging  to  the  Company. 

He  shall  render  to  the  Directors  and  to  the  Finance  Committee,  as  called 
for,  all  such  statements  and  accounts  as  may  be  required  of  him ;  shall  pre- 
pare an  annual  report  showing  the  financial  condition  of  the  Company  on 
the  3ist  day  of  December  in  each  year,  which  report  when  made  shall  be 
presented  to  the  next  succeeding  meeting  of  the  Board  of  Directors  and 
to  the  annual  meeting  of  stockholders ;  and  shall  make  such  other  reports 
and  do  such  other  things  incidental  to  his  position  as  may  be  required  of 
him  by  the  Board  of  Directors  or  by  the  Finance  Committee. 


BY-LAW    FORMS.  329 

SEC.  8.  The  Assistant  Treasurer. 

The  Assistant  Treasurer,  when  appointed,  shall,  in  the  absence,  the 
inability,  the  neglect  or  refusal  to  act  of  the  Treasurer,  be  vested  with  all 
the  powers  and  be  required  to  perform  all  the  duties  of  that  official.  At 
other  times  he  shall  assist  the  Treasurer  in  the  discharge  of  his  duties,  and 
shall  do  such  other  things  incidental  to  the  position  as  may  be  directed  by 
the  Board  of  Directors  or  Finance  Committee.  He  shall  give  bond  to  the 
Company  in  such  amount  and  in  such  form  and  with  such  security  as  may 
be  prescribed  by  the  Finance  Committee. 

Should  other  Assistant  Treasurers  be  appointed  by  the  Board,  they  shall 
have  such  powers  and  perform  such  duties  connected  with  the  financial 
administration  of  the  Company  as  may  be  assigned  to  them  by  the  Board 
of  Directors  or  the  Finance  Committee,  and  the  Directors  shall  have  power 
to  assign  to  any  such  assistant  official  such  of  the  powers  and  duties  of  the 
Treasurer  as  may  in  their  judgment  be  necessary  or  expedient 

SEC.  g.  The  Auditor. 

The  Auditor  shall  have  supervision  over  the  account  books,  and  over 
all  books  and  papers  relating  thereto,  subject  to  the  Finance  Committee, 
and  shall  examine  all  vouchers  and  audit  all  accounts.  He  shall  keep  such 
records  of  the  business  of  the  Company  as  will  at  all  times  show  the  condi- 
tion of  its  accounts.  He  shall  render  statements  to  the  President  and  to 
the  Finance  and  Executive  Committees  as  may  be  required,  showing  all 
disbursements  and  the  amount  of  money  due  to  the  Company  from  all 
sources,  or  otherwise  remaining  to  the  credit  of  the  Company,  and  he  shall 
make  such  reports  and  statements  as  may  be  required  of  him  from  time 
to  time. 

He  shall,  when  requested,  furnish  the  Board  of  Directors  or  Executive 
or  Finance  Committees,  a  statement  of  the  earnings  and  expenses  of  the 
corporation,  or  of  any  company  or  companies  controlled  by  this  corporation, 
and  shall  have  such  books  and  statistics  kept  as  may  be  necessary  for  this 
purpose. 

He  shall  verify  the  assets  reported  by  the  Treasurer  at  least  twice  a 
year,  and  make  report  of  the  same  to  the  Board  of  Directors  and  to  the 
Finance  Committee. 

He  shall  cause  the  books  and  accounts  of  all  officers  and  agents  charged 
with  the  receipt  or  disbursement  of  money  to  be  examined  as  often  as 
practicable,  or  when  requested  by  the  President  or  Finance  Committee, 
and  shall  ascertain  whether  or  not  the  cash  and  vouchers  covering  the 
balance  are  actually  on  hand. 

He  shall  render  such  assistance  and  advice  as  the  President,  Finance 
Committee  or  Executive  Committee  may  desire  concerning  the  books  and 
accounts  and  financial  systems  of  all  corporations  in  which  this  corporation 
is  interested. 

In  case  of  any  default  within  his  information  he  shall  forthwith  notify 
the  President. 

SEC.  10.  The  General  Counsel. 

The  General  Counsel  shall  be  the  chief  consulting  officer  of  the  Company 
in  all  legal  matters,  and,  subject  to  the  Board  of  Directors  and  Finance 
Committee,  shall  have  general  control  of  all  matters  of  legal  import  con- 
cerning the  Company.  He  shall  prepare  or  supervise  the  preparation  of 
all  important  instruments  required  in  the  operations  of  the  Company,  and 
shall  inspect  and  pass  upon  all  such  instruments  presented  for  the  accept- 
ance of  the  Company  as  may  be  of  sufficient  importance  to  justify  such 
examination ;  he  shall  have  general  direction  and  control  for  the  Company 
of  all  litigation  in  which  its  interests  may  be  involved,  and  shall  advise 
with  the  officers  of  the  Company  in  all  such  matters  relating  to  the  Com- 
pany's affairs  as  may  require  legal  consideration. 


330  FORMS    AND    PRECEDENTS. 

He  shall  be  present  at  all  meetings  of  the  stockholders  and  Directors, 
and  give  such  legal  opinions  and  advice  thereat  as  may  be  necessary;  he 
shall  also  attend  meetings  of  the  Executive  and  Finance  Committees  when 
requested  to  attend  by  the  Chairman  of  those  committees,  or  when  so 
directed  by  the  Board,  and  he  shall  perform  such  other  legal  duties  in 
connection  with  the  affairs  of  the  Company  as  may  be  requested  of  him 
by  the  Board  of  Directors  or  Finance  Committee. 

SEC.  n.  Delegation  of  Duties. 

In  case  of  the  absence,  the  disability,  or  the  refusal  to  act  of  any  officer 
of  the  Company,  the  Board  of  Directors,  or  Executive  Committee,  or,  in 
case  of  a  financial  officer,  the  Finance  Committee,  may  delegate  his  powers 
and  duties  to  any  other  officer  or  officers,  or  to  any  Director  or  Directors, 
for  the  time  and  until  the  proper  official  returns,  or  again  performs  his 
duties  or  his  successor  is  elected. 

ARTICLE  VI. — DIVIDENDS  AND  FINANCES. 
SEC.  i.  Dividends. 

The  Board  of  Directors,  in  its  discretion,  may  declare  dividends  from 
the  surplus  or  net  profits  of  the  Company  over  and  above  the  amount  which 
from  time  to  time  may  be  fixed  by  the  Board  as  the  amount  to  be  reserved 
for  working  capital. 

SEC.  2.  Working  Capital  and  Surplus. 

The  Board  of  Directors  shall  reserve  from  the  surplus  or  net  profits  of 
the  Company  such  amount  for  working  capital  as  may  from  time  to  time 
be  fixed  by  resolution,  and  shall  not  be  required  in  January  of  each  year 
to  declare  a  dividend  of  the  whole  of  its  accumulated  profit. 

SEC.  3.  Depositaries. 

The  Finance  Committee  or  the  Board  of  Directors  shall  from  time  to 
time  designate  the  depositaries  of  the  Company,  and  the  Treasurer  of  the 
Company  shall  deposit  the  Company  funds  therein,  in  the  name  of  the 
Company,  in  such  manner  and  amounts  as  may  be  provided. 

ARTICLE  VII. — SUNDRY  PROVISIONS. 
SEC.  i.  Offices  of  Company. 

The  principal  office  of  the  Company  in  the  State  of  New  Jersey  shall 
be  at  No.  15  Exchange  Place,  Jersey  City,  New  Jersey. 

The  principal  office  of  the  Company  in  the  State  of  New  York  shall  be 
in  the  City  of  New  York. 

The  Company  may  also  have  offices  at  such  other  places  as  the  Board  of 
Directors  may  from  time  to  time  appoint. 

SEC.  2.  Corporate  Seal. 

The  Corporate  Seal  of  the  Company  shall  consist  of  two  concentric 
circles  with  the  name  of  the  Company  between,  and  in  the  centre  shall  be 
inscribed  "  Incorporated  1904.  New  Jersey,"  and  such  seal,  as  impressed 
on  the  margin  hereof,  is  hereby  adopted  as  the  Corporate  Seal  of  the  Com- 
pany. 

SEC.  3.  Amendment. 

These  by-laws  may  be  amended,  repealed  or  altered,  in  whole  or  in 
part,  at  any  regular  meeting  of  the  stockholders,  or  at  any  special  meeting 
where  such  action  has  been  duly  announced  in  the  call  for  such  meeting. 

Subject  to  these  by-laws,  the  Board  of  Directors  shall  have  power  to 
make  additional  by-laws  of  the  Company  and  to  amend  and  repeal  by-laws 
so  made,  but  shall  not  have  power  to  amend  or  repeal  any  by-laws  adopted 
by  the  stockholders. 


CHAPTER  XLIV: 
UNDERWRITING    AGREEMENTS. 


Form    ii. — Underwriting    Agreement.     United    States    Ship- 
building  Company. 

THE   UNITED    STATES    SHIPBUILDING   COMPANY. 

A  corporation  to  be  organized  under  the  laws  of  the  State  of  New  Jersey, 
either  by  that  or  some  similar  name,  proposes  to  acquire  the  plants  and 
equipment  of  the  following  concerns,  or  their  capital  stocks,  free  from  any 
liens: 

THE  UNION  IRON  WORKS San  Francisco,  California. 

THE  BATH  IRON  WORKS,  LIMITED/ 


and 

THE  HYDE  WINDLASS  COMPANY, 
THE  CRESCENT  SHIP  YARD, 

and 


Bath,  Maine. 


Elizabethport,  New  Jersey. 


THE  SAMUEL  L.  MOORE  &  SONS  Co.,  g 

THE  EASTERN  SHIPBUILDING  COMPANY.  .. .  New  London,  Connecticut. 

THE  HARLAN  &  HOLLINGS WORTH  Co Wilmington,  Delaware. 

and 
THE  CANDA  MANUFACTURING  COMPANY.  ..  Carteret,  New  Jersey. 

UNDERWRITING  AGREEMENT. 

For  $9,000,000  Series  A  First  Mortgage,  Five  Per  Cent.  Sinking  Fund, 
Gold  Bonds,  due  1932,  part  of  an  authorized  issue  of  $16,000,000,  Bonds  of 
$1,000  each,  $5,500,000  being  withdrawn  from  public  issue  for  disposal  under 
the  Vendor's  and  Subscribers'  Contracts,  and  $1,500,000  being  Reserved 
in  the  Treasury  of  the  Company.  Additional  Bonds  may  be  issued  only 
for  the  purpose  of  acquiring  Additional  Plants  and  Equipment  and  for 
Improvements  and  Betterments,  upon  such  Terms  and  Conditions  as  shall 
be  Approved  by  the  Holders  of  a  Majority  of  the  Bonds  under  the  Present 
Issue  Outstanding  at  the  Time  of  such  Approval. 

We,  the  undersigned,  each  for  himself,  with  The  Mercantile  Trust 
Company,  for  itself  and  for  the  United  States  Shipbuilding  Company,  and 
to  and  with  each  other,  agree  to  subscribe  to,  receive  and  pay  for  the  amount 
of  five  per  cent,  first  mortgage,  sinking  fund,  gold  bonds  of  the  United 
States  Shipbuilding  Company  of  one  thousand  dollars  each,  set  opposite 
our  respective  signatures  hereto,  at  the  price  of  $900  for  each  bond,  25  per 
cent,  to  be  paid  upon  allotment  and  the  balance  upon  the  demand  vof  The 
Mercantile  Trust  Company. 

331 


332  FORMS  AND  PRECEDENTS. 

We  further  agree  to  receive  and  pay  for  any  smaller  amount  than  that 
subscribed  for  which  may  be  allotted  to  us  respectively. 

The  conditions  of  this  underwriting  agreement  are  as  follows : 

(1)  That  this  agreement  shall  not  be  binding  upon  the  undersigned 
unless  the  entire  amount  of  $9,000,000  of  bonds  shall  have  been  under- 
written. 

(2)  That  within  such  reasonable  time  as  shall  be  fixed  by  The  Mercan- 
tile Trust  Company  the  said  $9,000,000  of  bonds,  less  any  amount  with- 
drawn by  the  underwriters,  as  hereinafter  set  forth,  will  be  offered  to  the 
public,  through  such  banker  or  bankers  or  brokers  as  shall  be  designated 
by  The  Mercantile  Trust  Company,  for  subscription  at  not  less  than  95 
per  cent. 

(3)  With  the  consent  of  The  Mercantile  Trust  Company,  any  other 
concern  may  be  included  in  this  combination,  or  others  substituted  therefor, 
provided  the  working  efficiency  or  values  are  not  lessened  or  impaired. 

(4)  That,  if  the  amount  of  bonds  subscribed  and  paid  for  upon  such 
public  issues  shall  be  at  least  equal  to  the  amount  of  bonds  so  offered  to 
the  public,  then  all  liability  under  this  agreement  shall  cease. 

(5)  That,  in  case  the  amount  of  bonds  subscribed  for  upon  such  public 
offering  shall  be  less  than  the  total  amount  of  bonds  so  offered  to  the  public, 
or  in  case  the  bonds  subscribed  for  upon  such  public  issue  shall  not  be 
paid  for  to  an  amount  equal,  at  the  rate  of  95  per  cent.,  to  the  total  of  such 
public  offering,  then  such  deficiency  in  subscriptions  and  payments  will, 
upon  the  demand  of  The  Mercantile  Trust  Company,  be  made  good  by  the 
subscribers  hereto  in  the  manner  aforesaid,  pro  rata  in  the  proportion  their 
subscriptions  for  bonds  not  withdrawn  by  them  from  public  issue  bear  to 
the  total  amount  of  bonds  so  offered  to  the  public. 

(6)  That  each  underwriter  shall  receive  in  preferred  and  common  stock 
of  the  United  States  Shipbuilding  Company  25  per  cent,  of  the  par  value 
of  the  bonds  hereby  underwritten  in  each  kind  of  stock,  and  also  that  all 
the  proceeds,  not  to  exceed  5  per  cent.,  realized  from  the  sale  of  the  bonds 
at  public  issue  in  excess  of  90  per  cent.,  after  deducting  issue  expenses,  shall 
belong  to  the  underwriters. 

(7)  That  any  underwriter  shall  have  the  option  of  withdrawing  from 
the  public  issue  any  of  the  bonds  hereby  underwritten  by  him,  provided 
that  he  notify  The  Mercantile  Trust  Company  five  days  prior  to  the  date 
fixed  for  the  public  issue,  that  he  elects  to  purchase  said  bonds,  provided 
that,  in  the  proportion  of  the  bonds  so  purchased,  he  waives  his  said  right  to 
participate  in  the  cash  proceeds  realized  from  the  public  issue. 

(8)  That  no  underwriter  shall  sell  or  offer  for  sale  the  bonds  so  pur- 
chased, nor  any  of  the  bonus  shares  he  receives,  until  twelve  months  after 
the  date  of  payment,  without  the  consent  of  The  Mercantile  Trust  Company. 

New  York,  April  19,  1902. 


NAME. 


ADDRESS. 


BONDS    UNDERWRITTEN. 


UNDERWRITING   AGREEMENTS.  833 

Form  12. — Underwriting  Agreement.     Globe  Telegraph  Com- 
pany. 

THE   GLOBE  TELEGRAPH  COMPANY. 

A  corporation  to  be  organized  in  the  State  of  New  Jersey,  or  in  such 
other  State  as  may  be  agreed  upon,  under  the  name  "Globe  Telegraph 
Company,"  or  such  other  name  as  may  be  adopted  therefor,  to  acquire  all 
United  States  patents  for  the  Alwyn  System  of  Rapid  Telegraphy,  to  build 
and  operate  Telegraph  Lines,  etc. 


Capital  Stock $15,000,000 

Common $8,000,000 

Preferred 7,000,000 

Six  Per  Cent,  Non- Cumulative,  Voting. 


Stock  full  paid  and  non-assessable. 
Shares,  $100. 

In  Treasury  of  Company $12,000,000 

Preferred $7,000,000 

Common 5,000,000 


Withdrawn  from  Public  Issue  under  Contract  with  Vendors: 
Common  Stock  $3,000,000 

To  raise  funds  for  the  purposes  of  the  Company,  $6,000,000  of  Preferred 
Stock,  with  a  bonus  of  $3,000,000  of  Common  Stock,  is  now  offered  for 
underwriting  as  set  forth  below,  leaving  in  the  Treasury  of  the  Company 
$1,000,000  of  Preferred  Stock  and  $2,000,000  of  Common  Stock. 

UNDERWRITING  AGREEMENT. 

We,  the  undersigned,  each  for  himself,  agree  with  the  Standard  Trust 
Company,  of  New  York  City,  for  itself  and  for  the  Globe  Telegraph  Com- 
pany, and  to  and  with  each  other,  to  subscribe  to,  receive  and  pay  for  the 
amount  of  6  Per  Cent.,  Non-cumulative,  Preferred  Stock  of  the  Globe 
Telegraph  Company,  set  opposite  our  respective  signatures  hereto,  at  the 
price  of  $95  for  each  $100  share ;  25  per  cent,  to  be  paid  on  allotment  and 
the  balance  upon  call  of  the  said  Standard  Trust  Company;  but  no  call 
to  be  made  until  after  four  months  from  date  of  allotment  and  no  single 
call  to  be  for  more  than  25  per  cent. ;  thirty  days'  notice  to  be  given  prior 
to  any  call,  and  the  interval  between  calls  to  be  not  less  than  three  months. 

We  further  agree  to  receive  and  pay  for  any  smaller  amount  than  that 
subscribed  for,  which  may  be  allotted  to  us  respectively. 

The  conditions  of  this  Underwriting  Agreement  are  as  follows: 

(1)  That  this  agreement  shall  not  be  binding  until  at  least  $2,000,000 
face  value  of  said  preferred  stock  shall  have  been  underwritten  hereunder, 
and  the  subscribers  hereunto  formally  notified  thereof  by  the  said  Standard 
Trust  Company. 

(2)  That  any  underwriter  shall  have  the  option  of  withdrawing  from 
the  public  offering  hereinafter  provided  for  any  of  the  preferred  stock 
hereby  underwritten  by  him,  provided  that  he  notify  the  Standard  Trust 
Company,  in  writing,  not  less  than  ten  days  prior  to  the  date  fixed  for  said 
public  offering,  that  he  elects  to  so  withdraw  said  preferred  stock,  and  the 
stock  so  withdrawn  shall  be  paid  for  as  hereinbefore  set  forth. 


334  FORMS    AND    PRECEDENTS. 

(3)  That  within  such  reasonable  time  as  shall  be  fixed  by  the  said 
Standard  Trust  Company,  the  preferred  stock  hereby  underwritten,  less 
any  amount  withdrawn  by  the  underwriters,  shall  be  offered  to  the  public 
through  such  banker  or  bankers  or  brokers  as  shall  be  designated  by  the 
said  Standard  Trust  Company,  at  such  price  in  excess  of  $95  per  share, 
and  with  such  bonus  of  common  stock  therewith,  as  may  be  agreed  upon 
between  the  said  Standard  Trust  Company  and  a  majority  in  interest  of 
the  unwithdrawn  stock  hereby  underwritten. 

(4)  That  if  the  amount  of  preferred  stock  subscribed  for  upon  such 
public  offering,  and  paid  for,  shall  be  at  least  equal  to  the  amount  of  pre- 
ferred stock  not  withdrawn  and  offered  to  the  public  as  above  provided, 
then  all  liability  under  this  agreement  shall  cease  except  as  to  stock  with- 
drawn from  public  offering. 

(5)  That  in  case  the  preferred  stock  subscribed  for  upon  said  public 
offering,  and  paid  for  at  the  demanded  price,  shall  be  less  than  the  total 
amount  of  the  withdrawn  preferred  stock  so  offered,  then  upon  demand 
of  the  said  Standard  Trust  Company,  such  stock  remaining  unsubscribed 
or  unpaid  for  shall  be  taken  and  paid  for  by  the  subscribers  hereto  at  the 
rate  of  $95  per  share,  and  upon  the  terms  hereinbefore  set  forth,  in  propor- 
tion to,  but  only  up  to  the  amounts  of,  their  respective  subscriptions  not 
withdrawn  from  public  offering. 

(6)  That  from  the  proceeds  of  the  withdrawn  preferred  stock,  sold  as 
aforeprovided  at  public  sale,  and  paid  for,  such  amount  or  amounts  shall 
be  paid  so  soon  as  it  may  be  done,  to  the  underwriters  of  the  stock  so  sold 
and  paid  for,  as  shall  respectively  and  fully  reimburse  them  for  any  install- 
ments paid  by  them  upon  said  stock  under  the  terms  of  this  agreement. 

(7)  That  each  underwriter  shall  receive  with  each  two  shares  of  pre- 
ferred stock  withdrawn  or  paid  for  by  him  one  share  of  common  stock. 

(8)  That  all  proceeds  in  excess  of  $95  per  share,  after  deduction  of  all 
issue  expenses,  realized  from  the  sale  of  preferred  stock  underwritten  here- 
under  and  sold  at  public  offering  as  aforeprovided,  and  such  portion  of  the 
common  stock  attaching  as  a  bonus  to  the  preferred  stock  underwritten 
hereunder,  not  given  as  a  bonus  to  subscribers  on  public  issue,  or  delivered 
with,  or  held  for,  preferred  stock  withdrawn,  shall  belong  to  the  under- 
writers hereunder,  and  shall  be  delivered  to  them  in  proportion  to  their 
respective  subscriptions  not  withdrawn  from  public  offering. 

(9)  That  stock  withdrawn  or  paid  for  as  hereinbefore  provided  shall 
be  held  by  the  Standard  Trust  Company  until  full  payment  be  made  there- 
for, and  until  delivery  is  made  of  the  stock  subscribed  at  public  offering, 
when  such  withdrawn  or  paid-for  stock  shall  be  delivered  to  the  owners 
thereof. 

(10)  That  this   agreement  may  be   executed  in   separate  instruments 
with  the  same  force  and  effect  and  individual  obligation  as  if  all  the  signa- 
tures thereto  were  affixed  to  a  single  instrument. 

And  Whereas,  to  insure  the  proper  establishment  of  the  Company's  busi- 
ness, a  Voting  Trust  is  to  be  formed,  to  hold  and  vote  the  stock  of  the 
Globe  Telegraph  Company  for  a  term  of  five  years,  and  Trustees'  receipts 
are  to  be  issued  for  the  stock  so  held  and  voted ; 

Now  Therefore,  we,  the  undersigned,  hereby  respectively  agree  that  we 
will  accept  and  receive,  in  lieu  of  the  stock  hereby  subscribed  for,  said 
Trustees'  receipts  to  the  full  amounts  of  our  respective  subscriptions  here- 
under. 

New  York. 


NAME.  ADDRESS.  SHARES.  AMOUNT. 


CHAPTER  XLV. 
VOTING  TRUST  AGREEMENTS. 


Form  13. — Voting  Trust  Agreement.     Glen  Harbor  Improve- 
ment Company. 


VOTING  TRUST  AGREEMENT. 

We,  The  Undersigned,  stockholders  of  the  Glen  Harbor  Improvement 
Company,  a  corporation  duly  organized  under  the  laws  of  the  State  of 
New  York,  and  having  its  principal  office  in  the  City  of  Ypnkers,  in  said 
State  of  New  York,  do  hereby,  in  consideration  of  the  premises  and  of  our 
mutual  undertakings  as  herein  set  forth,  severally  agree  to  transfer  and 
deliver  the  shares  of  stock  held  by  each  of  us  in  said  corporation,  to  Emmett 
M.  Brown,  William  Swift  and  Andrew  McBride,  all  of  the  said  City  of 
Yonkers,  as  Voting  Trustees  hereunder,  and  mutually  agree  with  them 
and  with  each  other  that  said  Trustees  shall  hold  and  vote  the  said  stock 
for  the  period  of  five  years  from  the  date  hereof,  for  the  purposes  and 
under  the  following  terms  and  conditions : 

1.  All  stockholders  of  the  said  Company  may  join  in  the  voting  trust 
hereby   created,   by  signing   this  present  agreement  and  transferring,  in 
whole  or  in  part,  the  shares  of  stock  held  by  them  in  said  Company  to  the 
said  Trustees,  under  the  conditions  and  for  the  purposes  of  this  present 
agreement. 

2.  Each  stockholder  in  said  Company  joining  this  voting  trust  as  afore- 
provided  shall  become  a  party  thereto  from  the  date  on  which  stock  owned 
by  such  stockholder  in  said  Company  shall  be  transferred  and  delivered  to 
said  Trustees  for  the  purposes  of  this  agreement. 

3.  The  said  Trustees  shall  surrender  to  the  proper  officer  of  the  said 
Glen  Harbor  Improvement  Company,  for  cancellation,  the  certificates  for 
all  shares  of  stock  transferred  to  said  Trustees,  and  shall,  in  place  thereof, 
have  certificates  of  said  Company  issued  to  themselves  as  Trustees,  and 
on  the  face  of  each  said  Trustees'  certificate  shall  be  stated  the  fact  that 
such  certificate  has  been  issued  pursuant  to  this  agreement. 

4.  The  said  Trustees  shall  collect  and  receive  all  dividends  and  profits 
accruing  to  said  stock  and  shall  pay  over  the  same  to  the  respective  equitable 
owners  thereof. 

5.  The  said  Trustees  shall  issue  to  each  stockholder  becoming  a  party 
thereto   one  or  more  transferable   Trustees'  receipts   for  the  number  of 
shares  of  stock  placed  by  each  of  said  stockholders  respectively  in  this 
voting  trust,  and  when  such  Trustees'  receipts  are  duly  transferred  to  other 
parties,   said   Trustees  shall   recognize   such   other  parties  as  the  lawful 
assigns  and  successors  of  the  original  parties  hereto,  entitled  to  all  of  their 
rights  in  the  premises. 

6.  The  stock  held  under  this  agreement  shall,   except  as  hereinafter 
specially  provided,  be  voted  at  any  meeting  of  the  stockholders  of  said 
Company  by  such  of  the  said  Trustees  as  may  be  present  thereat,  and  said 

335 


336  FORMS  IAND  PRECEDENTS. 

vote  shall  be  cast  as  in  the  judgment  of  a  majority  of  the  said  Trustees 
present  at  any  such  meetings  may  be  for  the  best  interests  of  the  stock- 
holders subscribing  to  this  agreement. 

7.  In  all  elections  for  Directors  the  said  stock  shall  be  voted  for  the 
re-election  of  the  present  members  of  the  Board  of  Directors  of  said  Com- 
pany, or,  in  the  event  of  the  death,  disability  or  refusal  to  serve  of  any 
such  members,  the  said  stock  shall  be  voted  for  such  other  person  or 
persons  as,  in  the  judgment  of  said  Trustees,  shall  be  most  suitable  for 
such  office. 

8.  This  agreement  shall  terminate  five  years  from  the  date  hereof,  and 
upon  such  termination  the  said  Trustees  shall,  as  the  outstanding  Trustees' 
receipts  are  surrendered  to  them,  duly  endorsed,  give  over  to  the  said 
Company  the  certificates  of  stock  held  by  said  Trustees,  in  pursuance  of 
this  agreement,  properly  endorsed,  and  shall  direct  the  officers  of  said 
Company  to   deliver  to  the   respective  owners   of  the   said  surrendered 
Trustees'  receipts  certificates  for  such  number  of  shares  of  stock  as  may 
be  necessary  to  satisfy  the  requirements  of  the  said  surrendered  Trustees' 
receipts. 

9.  In  event  of  the  death,  disability,  resignation  or  refusal  to  act  of  any 
of  the  Trustees  herein  named,  the  remaining  Trustees,  or  Trustee,  shall 
have  power  to  suitably  fill  such  vacancy  or  vacancies,  and  the  person  or 
persons  so  appointed  shall  be  empowered  and  authorized  to  act  hereunder 
in  all  respects  as  if  originally  named  herein. 

10.  A  duplicate  of  this  agreement  shall  be  filed  in  the  principal  office 
of  the  said  Company  in  Yonkers  and  shall  there  be  kept  for  the  inspection 
of  any  stockholder  of  the  Company,  daily,  during  business  hours. 

In  Testimony  Whereof,  the  parties  to  this  agreement  have  here- 
unto affixed  their  hands  and  seals  in  the  said  City  of  Yonkers 
this  27th  day.  of  February,  1908. 

SHARES 

VOTING  TRUSTEES.  STOCKHOLDERS.  TRANSFERRED. 


EMMETT  M.  BROWN.     [L.  s.]     JAMES  HALSEY. 
WILLIAM   SWIFT.  [L.  s.]      ERNEST  JURGENS. 

ANDREW  MCBRIDE.         [L.  s.]     HAROLD  M.  GILSEY. 

WILLIS  M.  AMES. 


L.  s. 
L.  s. 
L.  s. 

L.  S. 


50 
125 

75 
75 


Form  14. — Voting  Trust  Agreement.     Colorado  Western  Rail- 
road Company. 

WISCONSIN  WESTERN  RAILROAD  COMPANY. 


VOTING  TRUST  AGREEMENT. 
Dated  February  i,  1908. 

WILLIS  B.  ARNOLD, 
HENRY  M.  IVES, 
H.  H.  ELLIS, 

Voting    Trustees. 

This  Agreement,  made  and  entered  into  on  the  first  day  of  February, 
1008,  by  and  between  the  holders  of  the  certificates  of  the  capital  stock  of 
the  Wisconsin  Western  Railroad  Company,  a  corporation  organized  and 


VOTING^  TRUST    AGREEMENTS.  337 

existing  under  the  laws  of  the  State  of  New  Jersey,  who  shall  become 
parties  thereto  (hereinafter  referred  to  as  the  stockholders),  parties  of  the 
first  part,  and  Willis  B.  Arnold,  Henry  M.  Ives  and  H.  H.  Ellis  (herein- 
after referred  to  as  the  Trustees),  parties  of  the  second  part. 

Whereas,  said  stockholders  deem  it  to  be  advisable  and  for  the  best 
interests  of  all  of  the  stockholders  of  the  Company  that  the  control  and 
supervision  of  its  business  shall,  for  a  definite  period  of  time,  be  vested  in 
trustees;  and 

Whereas,  the  said  Trustees  have  agreed,  during  the  period  hereinafter 
named,  to  endeavor  to  exercise  the  authority  resulting  from  the  control 
of  the  stock  transferred  to  them,  pursuant  to  the  terms  hereof,  to  make 
effective  the  desires  of  the  said  stockholders  as  hereinbefore  recited. 

Now,  Therefore,  This  Agreement  Witnesseth  that,  in  consideration 
of  the  premises,  and  of  the  agreements  hereinafter  contained  on  the  part 
of  the  stockholders  and  of  the  Trustees,  each  of  the  said  holders  of  the 
certificates  of  the  capital  stock  of  the  Wisconsin  Western  Railroad  Com- 
pany who  shall  deposit  the  same  with  the  International  Trust  Company, 
of  No.  21  Broadway,  in  the  City  of  New  York  (hereinafter  called  the  De- 
positary), or  with  such  other  depositary  as  shall  be  appointed  as  herein- 
after provided,  agrees  for  himself  and  not  for  the  others,  but  with  the 
others  and  with  the  Trustees,  and  the  Trustees  agree  with  the  stock- 
holders, as  follows: 

First — That  all  certificates  of  the  capital  stock  of  the  said  Company 
deposited  as  aforesaid  shall  be  properly  endorsed  for  transfer  on  the  books 
of  the  said  Company,  and  the  shares  represented  thereby  shall  be  duly 
assigned  to  the  said  Trustees,  and  that  the  deposit  of  a  certificate  of  stock 
shall  constitute  the  depositor  a  party  hereto  with  the  same  force  and  effect 
as  though  he  had  personally  signed  this  agreement. 

Second — That  after  said  shares  shall  have  been  duly  transferred  to  the 
said  Trustees  on  the  books  of  the  Company,  the  certificate  or  certificates 
therefor  shall  be  returned  to  and  thereafter  remain  in  the  custody  of  the 
depositary  (unless  said  depositary  be  changed,  as  hereinafter  provided) 
for  the  full  term  of  five  years  from  the  first  day  of  June,  1904. 

Third — That,  during  the  said  period  of  five  years,  the  legal  title  and 
all  rights,  powers  and  privileges  in,  to  and  over  the  stock  represented  by 
the  said  certificates,  including  the  right  to  vote  thereon,  in  person  or  by 
proxy,  shall  be  and  remain  vested  in  the  said  Trustees,  except  as  is  herein 
otherwise  provided. 

Fourth — Upon  receiving  on  deposit  hereunder  certificates  of  stock  prop- 
erly endorsed  for  transfer  on  the  books  of  said  Railroad  Company,  said 
depositary,  as  agent  for  the  Trustees,  shall  issue  to  each  depositor  thereof, 
or  to  his  assigns,  a  certificate  or  certificates  of  interest  in  the  stock  so 
transferred,  representing  the  number  of  shares  deposited  by  them  respec 
tively.  The  certificate  of  interest  to  be  issued  to  or  upon  the  direction  of 
those  depositing  such  stock,  shall  be  substantially  in  the  following  form : 

WISCONSIN  WESTERN  RAILROAD  COMPANY. 
Organized  under  the  laws  of  the  State  of  New  Jersey. 
No Shares. 

Certificate   of   interest   in   stock  deposited   under   agreement   of 
February  ist,  1908. 

Willis  B.  Arnold,   Henry   M.  Ives   and   H.   H.   Ellis,  Trustees, 
by  International  Trust  Company,  their  agent,   having  received  on 
deposit  certificates  of  stock  of  Wisconsin  Western  Railroad  Com- 
pany, of  the  par  value  of  one  hundred  dollars  ($100)  each,  for 
shares,  which  shares  are  held  under  the  above  mentioned  agreement, 


338  FORMS    AND    PRECEDENTS. 

to  the  terms  of  which  the  holder  hereof  assents  by  receiving  this 
certificate. 

Hereby  certify  that  is  entitled, 

subject  to  the  provisions  of  said  agreement,  to  an  interest  in  the 
stock  deposited  thereunder,  to  the  extent  of  the  number  of  shares 
hereinabove  stated. 

This  certificate  entitles  the  holder  to  no  voting  power. 

The  interest  represented  thereby  is  transferable  only  on  the  books 
of  the  undersigned,  kept  for  that  purpose  at  the  office  of  the  Inter- 
national Trust  Company,  by  the  holder  thereof,  in  person  or  by 
proxy,  upon  surrender  of  this  certificate,  properly  endorsed. 

Dated  190  . 

WILLIS  B.  ARNOLD, 
HENRY  M.  IVES, 
H.    H.    ELLIS, 

Trustees. 
By 

INTERNATIONAL   TRUST   COMPANY, 

Depositary  and  Transfer  Agent, 
By 

The  said  certificates  shall  contain  endorsements  for  the  transfer  of  the 
interest  represented  thereby  substantially  in  the  following  form: 

For  Value  Received  hereby  sell, 

assign  and  transfer  unto  the 

interest  in  the  shares  of  the  capital  stock  of  the  Wisconsin  Western 
Railroad  Company  represented  by  the  within  certificate,  and  do  hereby 
irrevocably  constitute  and  appoint 

attorney  to  transfer  the  said  interest  on  the  books  of  the  within 
named  Trustees,  with  full  power  of  substitution  in  the  premises. 

Dated  190  . 


In  presence  of 


In  an  appropriate  place  on  the  back  of  the  said  certificates  the  following 
words  shall  also  appear : 

NOTICE. — The  signature  to  this  assignment  must  correspond  with 
the  name  as  written  upon  the  face  of  the  certificate  in  every  particular, 
without  alteration  or  enlargement,  or  any  change  whatever. 

The  Trustees  may,  in  their  discretion,  procure  the  said  certificates  of 
interest  to  be  listed  upon  any  stock  exchange  or  broker's  board ;  and  they 
may  make  such  changes  in  the  forms  thereof  as  may  be  necessary  for  them 
to  conform  to  the  rules  of  any  such  exchange  or  board. 

Fifth — The  interest  represented  by  any  certificate  so  issued  may  be 
transferred  by  the  holder  thereof  in  person  or  by  attorney  thereunto  duly 
authorized,  and  a  new  certificate  or  certificates  issued  therefor  by  the  depos- 
itary as  agent  for  the  Trustees,  but  only  as  therein  provided. 

Sixth — All  dividends  that  may  accrue  upon  the  stock  so  deposited  shall 
be  paid  by  the  Trustees  to  the  said  depositary,  who  shall  distribute  the 
same  pro  rata  among  the  holders  of  said  certificates  of  interest,  in  the  pro- 
portion in  which  they  shall  severally  be  entitled  thereto. 

Seventh — In  the  event  of  the  death,  resignation,  incapacity  or  refusal 
to  act  of  any  of  the  said  Trustees,  the  surviving  or  remaining  Trustee  or 
Trustees  may  designate  a  successor  or  successors  by  certificate  in  writing, 
deposited  or  filed  with  the  said  depositary,  and  after  the  appointment  of 


VOTING    TRUST    AGREEMENTS.  339 

such  successor  Trustee  or  Trustees,  he  or  they  shall  have  and  exercise  all 
of  the  power  and  authority  herein  granted  to  the  Trustees  herein  named 
with  the  same  force  and  effect  as  though  he  or  they  had  been  originally 
named  as  a  Trustee  or  Trustees  herein. 

Eighth — The  said  depositary  designated  herein,  or  its  successor  or 
successors,  shall  be  and  remain  the  agent  of  the  Trustees  for  the  transfer 
of  the  said  certificates  of  interest  in  the  capital  stock  of  the  said  Wisconsin 
Western  Railroad  Company  until  the  expiration  of  the  trust  hereby  created ; 
and  in  the  event  of  the  refusal  or  inability  of  the  depositary  to  act,  the 
Trustees  may  make  such  arrangements  and  agreements  as  may  be  advisable 
for  the  cancellation  of  certificates  of  interest  issued  by  such  depositary, 
and  shall  have  full  authority  to  appoint  another  depositary  to  act  hereunder 
in  its  place,  and  to  authorize  and  arrange  for  the  delivery  by  the  retiring 
depositary  to  the  depositary  so  appointed  of  all  certificates  of  stock  then 
held  hereunder  by  the  former.  Upon  the  acceptance  of  such  appointment 
the  new  depositary  shall  be  clothed  with  all  of  the  power  and  authority, 
and  be  subject  to  all  of  the  duties  and  obligations^  hereby  imposed  upon 
the  depositary  herein  named.  Any  depositary  acting  hereunder,  and  its 
or  their  successors,  shall  receive  reasonable  compensation  for  its  and  their 
services.  Any  depositary  may  resign  its  trust  hereunder  by  giving  thirty 
days'  notice  in  writing  of  its  intention  so  to  do,  which  notice  shall  be 
directed  to  all  and  delivered  to  any  one  of  the  Trustees  then  acting.  In  the 
event  of  such  resignation,  a  successor  may  be  appointed  by  the  Trustees 
as  hereinbefore  provided. 

Ninth — In  exercising  their  rights,  powers  and  privileges  hereunder,  the 
Trustees  will  use  their  best  judgment  from  time  to  time  to  select  suitable 
Directors  of  the  said  Railroad  Company,  to  the  end  that  the  affairs  of  the 
said  Company  shall  be  properly  managed  and  conducted  in  the  interests 
of  all  the  stockholders  of  the  said  Company,  and  in  voting  upon  all  other 
matters  which  may  come  before  them  at  any  stockholders'  meeting,  will 
exercise  like  judgment,  and  will  from  time  to  time  inform  the  stockholders 
regarding  the  progress  and  condition  of  the  business  of  the  Company.  It 
is  understood,  however,  that  no  Trustee  shall  incur  any  personal  respon- 
sibility by  reason  of  any  matter  or  thing  done  or  omitted  to  be  done  by 
him  in  connection  with  the  execution  of  said  trust,  except  for  his  individual 
malfeasance. 

Tenth — The  Trustees  may  make  such  rules  for  the  transaction  of  their 
business  hereunder  as  to  them  shall  seem  proper  and  as  shall  be  in  accord- 
ance with  the  terms  of  this  agreement.  They  may  act  by  a  majority  of 
their  number  at  any  regular  or  special  meeting  convened  on  notice,  or  by 
writing  signed  by  such  majority  without  a  formal  meeting.  The  trust 
hereby  created  may  be  terminated  at  any  time  by  consent  of  the  Trustees, 
which  consent  shall  be  in  writing,  delivered  to  and  lodged  with  each  of  the 
depositaries  which  shall  then  be  acting  hereunder.  Upon  such  termination, 
or  upon  the  expiration  of  the  agreement  by  lapse  of  time,  all  shares  of 
stock  of  the  said  Railroad  Company  then  on  deposit  hereunder  shall  be 
distributed  among  the  registered  holders  of  the  said  certificates  of  interest, 
upon  the  surrender  of  such  certificates,  duly  endorsed,  to  the  depositaries, 
in  such  manner  that  each  holder  of  a  certificate  or  certificates  of  interest 
in  the  said  stock  shall  receive  a  certificate  or  certificates  for  a  number  of 
shares  of  the  said  stock  equal  to  the  number  of  shares  named  in  his  said 
certificate  or  certificates  of  interest. 

Eleventh — The  Trustees  shall  not  sell,  pledge,  hypothecate,  mortgage  or 
place  any  lien  or  charge  upon  the  shares  of  stock  deposited  hereunder. 

Twelfth — No  depositary  hereunder  shall  incur  any  liability  to  any  of 


340 


FORMS    AND    PRECEDENTS. 


the  parties  hereto,  except  for  the  exercise  of  ordinary  care  in  the  perform- 
ance of  its  duties  as  herein  prescribed. 

Thirteenth — This  instrument,  or  any  other  writing  required  by  this 
instrument  to  be  signed  or  executed,  may  be  executed  in  any  number  of 
like  instruments  of  similar  tenor,  each  of  which  so  signed  shall  be  treated 
as  an  original. 

Fourteenth — This  agreement  shall  be  binding  upon  and  shall  inure  to 
the  benefit  of  the  parties  hereto,  their  personal  representatives,  successors 
and  assigns. 

In  Witness  Whereof,  the  said  Stockholders  have  either  executed 
these  presents  or  become  parties  hereto  by  depositing  certifi- 
cates for  their  said  stock  as  herein  provided,  and  the  said 
Trustees  have  hereunto  set  their  hands  on  the  day  and  date 
first  above  mentioned. 

STOCKHOLDERS. 


NAMES. 


RESIDENCES. 


NO.  OF 

SHARES. 


The  undersigned  International  Trust  Company  of  New  York,  the 
depositary  named  and  referred  to  in  the  foregoing  instrument,  hereby 
acknowledges  the  receipt  of  a  copy  of  the  said  instrument,  and  notice  of  all 
of  the  terms  thereof,  and  hereby  gives  its  assent  to  the  same  and  agrees 
to  act  as  depositary  and  transfer  agent  under  the  terms  and  conditions 
therein  set  forth. 

In  Witness  Whereof,  it  has  caused  this  consent  to  be  executed 
by  its  duly  authorized  officer  and  its  -corporate  seal  to  be 
hereunto  affixed  this  ist  day  of  February,  1008. 


CHAPTER   XLVI. 
SUBSCRIPTION   LISTS   AND   CONTRACTS. 


The  general  subject  of  subscription  lists  and  contracts  is 
treated  very  fully  in  Chapter  II.  of  the  present  volume.  No 
general  discussion  is  therefore  attempted  here. 

Form  15. — Subscription  List. 

SUBSCRIPTION  LIST. 
THE  INTERLOCKING  SWITCH  COMPANY. 


To  be  Incorporated  under  the  Laws  of  New  York. 


Capital   Stock $100,000 

Shares $100  each. 


We,  the  undersigned,  hereby  severally  subscribe  for  and  agree  to  take 
at  their  par  value  the  number  of  shares  of  the  capital  stock  of  the  Inter- 
locking Switch  Company  set  opposite  our  respective  signatures,  said  sub- 
scriptions to  become  due  so  soon  as  said  Company  is  organized  and  to 
be  then  payable  in  cash  on  demand  of  the  Treasurer  of  the  Company. 

New  York  City,  N.  Y., 
March  I4th,  1908. 

NAMES.  ADDRESSES.  SHARES.    AMOUNTS. 

Harry  H.  Collins 235  West  23rd  St.,  N.  Y 10         $1,000 

David  B.  White 975  Willis  Ave.,  N.  Y 8  800 

Willard  H.  Ellison Brooklyn,  N.  Y 8  800 

When  subscriptions  are  solicited  widely  or  from  parties  at 
a  distance,  an  individual  subscription  blank  is  usually  em- 
ployed and  is  mailed  with  such  statements  and  prospectuses 
as  may  be  necessary.  The  following  is  a  common  form. 

341 


342  FORMS   AND    PRECEDENTS. 

Form  1 6. — Subscription  Blank.    Individual. 

THE  ALL-RUBBER  TIRE  COMPANY. 

175  Montgomery  St. 

Jersey  City,  N.  J. 


To  be  Incorporated  under  the  Laws  of  New  Jersey 
for  the  Manufacture  of  Automobile  Tires. 

Capital  Stock $500,000 

Shares $10  each. 

I  hereby  subscribe  for   shares   of  the  capital   stock  of  the 

All-Rubber  Tire  Company  at  the  par  value  thereof,  and  agree  to  pay 
twenty-five  per  cent,  of  such  subscription  on  demand  of  the  Treasurer 
so  soon  as  said  Company  is  incorporated,  and  twenty-five  per  cent,  on 
demand  of  the  Treasurer  of  the  Company  at  any  time  after  ninety  days 
from  the  incorporation  of  said  Company;  the  remainder  of  said  subscrip- 
tion to  be  paid  at  such  times  and  in  such  amounts,  not  exceeding  ten  per 
cent,  of  said  subscription  in  any  one  month,  as  may  be  required  by  the 
Board  of  Directors  of  said  Company. 

Dated  at  . 


The  right  is  reserved  to  reject  or  pro-rate  any  or  all  subscriptions. 

The  reservation  of  the  right  to  reject  or  pro-rate  sub- 
scriptions enables  the  parties  in  control  to  exclude  undesirable 
subscribers  and  also  to  scale  or  reject  applications  in  case  of 
over-subscriptions. 

Form  17. — Subscription  to  Bank  Stock.    Individual. 

SUBSCRIPTION  FOR  STOCK. 
THE  SECURITY  NATIONAL  BANK. 
No.  57  Broadway,  New  York. 
Capital,  $1,000,000.  Surplus,  $1,000,000. 

New  York,  1908. 

The  undersigned  applies  for shares  of  the  Capital  Stock 

of  The  Security  National  Bank  of  New  York,  at  Two  Hundred  ($200) 
Dollars  per  share  and  agrees  to  accept  such  portion  as  may  be  allotted 
and  pay  for  same  when  called. 

No.  of  Shares, 

Name, 

Address, 


SUBSCRIPTION    LISTS    AND    CONTRACTS.  343 

Stockholders  of  financial  institutions  in  New  York  are 
liable  for  debts  of  the  company  to  an  amount  equal  to  the  par 
value  of  the  stock  of  the  institution  owned  by  them.  This 
double  liability  is  usually  provided  for  at  the  time  of  organiza- 
tion by  placing  the  price  of  the  stock  at  200,  as  in  the  fore- 
going application.  This,  when  paid,  creates  a  surplus  equal 
in  amount  to  the  capital  stock  of  the  institution  and,  the  stock- 
holders having  already  paid  in  twice  the  par  value  of  their 
stock,  are  relieved  of  any  further  liability  thereon. 

The  foregoing  application  was  sent  out  accompanied  by  a 
list  of  the  proposed  directors  of  the  company  and  by  the  fol- 
lowing letter. 

Form   1 8. — Letter  Accompanying  Blank. 

THE  SECURITY  NATIONAL  BANK 
OF  NEW  YORK. 

No.  57  Broadway. 
Capital  $1,000,000.  Surplus  $1,000,000. 

New  York,  Feb.  28,  1908. 
Mr.  JOHN  EDWARDS, 

New  York,  N.  Y. 
DEAR  SIR — 

It  is  proposed  to  organize  a  National  Bank  with  One  Million 
($1,000,000)  Dollars  Capital,  divided  into  Ten  Thousand  (10,000)  Shares 
at  One  Hundred  ($100)  Dollars  per  Share,  and  a  Surplus  of  a  like 
amount.  Offices  of  the  Bank  will  be  located  at  No.  57  Broadway,  New 
York  City.  Upwards  of  One  Million  Five  Hundred  Thousand  ($1,500,000) 
Dollars  have  already  been  subscribed  towards  the  proposed  Organization 
and  the  gentlemen  named  on  the  opposite  page  will  act  as  Directors. 

A  form  of  Subscription  is  herewith  enclosed  and  you  are  invited  to 
become  a  Subscriber  to  the  Capital  Stock. 

Subscribers  are  requested  to  forward  their  subscriptions  to  the  under- 
signed at  the  above  address. 

Truly  Yours, 

WILLIS  S.  PARKER, 

Chairman  of  Organisation  Committee. 
N.  B. — Subscription  books  will  close  on  March  tenth. 

Subscriptions  made  under  the  foregoing  list  or  applications 
are  of  the  nature  of  a  continuing  proposition,  and,  until  the 
company  is  organized  and  has  actually  accepted  them  are 
revocable  at  the  will  of  the  subscribers.  (See  §  10.)  To 
avoid  this  element  of  uncertainty,  subscription  lists  are  some- 
times drawn  as  in  the  following  form,  with  a  trustee  acting 
for  the  corporation. 


344  FORMS    AND    PRECEDENTS. 

Form  19. — Subscription  List.    Trustee's. 

SUBSCRIPTION  LIST. 
WINONA  CEMENT  COMPANY. 
215  Broad  St.,  Newark,  N.  J. 

To  be  Incorporated  under  the  Laws  of  the  State  of  New  Jersey  for  the 
Manufacture  of  Portland  Cement. 


Capital  Stock $1,000,000 

Shares $100  each. 

We,  the  undersigned,  hereby  agree  with  James  J.  McLaren  as  Trustee 
for  the  Winona  Cement  Company,  to  subscribe,  and  do  hereby  severally 
subscribe,  for  the  number  of  shares  of  the  capital  stock  of  said  Company 
set  opposite  our  respective  signatures,  and  agree  to  pay  the  par  value 
thereof  as  follows: 

Ten  per  cent,  on  demand  to  James  J.  McLaren  as  Trustee  for  said 
Company,  such  payment,  or  so  much  thereof  as  may  be  necessary,  to  be 
used  for  the  preliminary  and  incorporating  expenses  of  said  Company; 
thirty  per  cent,  to  the  Treasurer  of  the  Company  so  soon  as  said  corpora- 
tion is  organized;  twenty-five  per  cent,  on  demand  of  the  Treasurer  of 
the  Company  at  any  time  after  ninety  days  from  the  date  of  incorporation, 
and  the  remainder  at  such  times  and  in  such  installments  as  may  be  pre- 
scribed by  the  Board  of  Directors. 
Newark,  New  Jersey, 

February  I5th,  1908. 

NAMES.  ADDRESSES.  SHARES.       AMOUNTS. 

Mr.  Alfred  H.  Braum..  .Paterson,  N.  J 50  $5,ooo 

James  H.  Allen 25  Wall  St.,  N.  Y 75  7,5oo 

William  Raymond Brooklyn,  N.  Y 50  5,000 


Subscriptions  under  this  form  are  held  to  be  a  contract 
between  the  subscribers  and  the  trustee.  They  cannot  there- 
fore be  withdrawn  nor  revoked  but  are  binding  from  the  date 
when  made.  The  subscription  list  which  follows  is  of  a  simi- 
lar nature. 

Form  20. — Subscription  List.    Agreement  with  Promoters. 

SUBSCRIPTION  LIST. 
HARRISON  COTTON  MILLS. 

Capital  Stock $500,000 

Shares $100  each. 

We,  the  undersigned,   hereby  agree  with  William   H.   Hamilton  and 
John  B.  Rawley,  both  of  New  York  City,  New  York,  as  Promoters  and 


SUBSCRIPTION    LISTS    AND    CONTRACTS.  345 

Trustees  of  the  Harrison  Cotton  Mills,  a  corporation  to  be  organized  under 
the  laws  of  the  State  of  North  Carolina  for  the  purposes  and  under  the 
conditions  set  forth  in  the  attached  statement,  to  subscribe,  and  do  hereby 
severally  subscribe  for  the  number  of  shares  of  the  Treasury  Stock  of 
said  Company  set  opposite  our  respective  signatures  at  the  rate  of  Seventy- 
five  Dollars  ($75)  for  each  One  Hundred  Dollar  share,  and  agree  to  pay 
the  amounts  of  pur  respective  subscriptions  to  the  Treasurer  of  the  Har- 
rison Cotton  Mills  as  soon  as  the  said  Company  is  incorporated  and  its 
Treasury  Stock  ready  for  issue ;  said  stock  to  be  delivered  to  the  respective 
subscribers  therefor  full-paid  and  non-assessable  upon  payment  of  the 
said  subscription  price. 

It  is  mutually  agreed  between  the  subscribers  hereto  and  the  said 
William  H.  Hamilton  and  John  B.  Rawley,  Promoters  and  Trustees  of 
said  proposed  corporation,  that  the  subscriptions  of  this  present  contract 
are  conditioned  upon  bona  fide  subscriptions  for  stock  to  the  par  value 
of  Three  Hundred  Thousand  Dollars  being  secured  hereunder  within 
ninety  days  from  the  date  hereof,  and  otherwise  are  null  and  void. 

New  York  City,  New  York, 
February  26,  1908. 

NAMES.  ADDRESSES.  SHARES.       AMOUNTS. 

Samuel  H.  French Raleigh,  N.  C 50  $3,750 

Charles  H.  Wellbourne.  .Raleigh,  N.  C 50  3,750 

H.  G.  Williamson New  York  City,  N.  Y 100  7,500 


Such  a  subscription  list  is  usually  circulated  with  a  state- 
ment attached  giving  full  details  as  to  the  capitalization  and 
purposes  of  the  company.  When  signed  it  forms  an  irre- 
vocable contract  between  the  subscribers  and  the  trustees. 

This  subscription  contract  requires  the  delivery  of  full  paid 
treasury  stock,  notwithstanding  the  fact  that  the  subscription 
price  amounts  to  but  seventy-five  per  cent,  of  its  face  value. 
This  is  usually  accomplished  by  the  issuance  of  the  stock  for 
property  and  the  return  of  a  portion  of  this  issued  stock  to  the 
company  to  be  sold  for  operating  capital.  Full-paid  treasury 
stock  is  thus  secured  which  can  then  be  delivered  in  accord- 
ance with  the  requirements  of  the  contract.  (See  §  210.) 

The  subscription  agreement  which  follows  is  also  made 
with  trustees  acting  for  the  company  and  is  irrevocable  as 
far  as  its  subscribers  are  concerned,  unless  some  failure  of 
its  conditions  voids  the  subscriptions.  This  agreement  would 
usually  be  accompanied  by  a  prospectus  or  statement  giving 
the  important  details  of  the  proposed  incorporation. 


346  FORMS    AND    PRECEDENTS. 

Form  21. — Subscription  List.    Preferred  Stock  with  Bonus. 

SUBSCRIPTION  LIST. 
MIDVALE  FOUNDRY  COMPANY. 


To  be  Incorporated  under  the  Laws  of  the   State  of  West 

Virginia  for  the  Purpose  of  Acquiring  Coal  and 

Iron  Lands,  and  the  Mining,  Preparation 

and  Sale  of  the  Minerals  Obtained 

Therefrom. 


Capital   Stock $1,000,000 

Common    Stock $750,000 

Preferred    Stock $250,000 

Shares $100  each. 

FREDERICK  BARING,      ] 

HENRY  L.  SIMPSON,    ^Trustees. 

JOHN  COCHRAN, 

We,  the  undersigned,  do  hereby  severally  subscribe  for  the  number  of 
shares  of  the  Preferred  Stock  of  the  Midvale  Foundry  Company  set 
opposite  our  respective  signatures,  at  the  par  value  of  One  Hundred 
Dollars  per  share,  and  contract  and  agree  with  the  above-named  Trustees 
to  pay  our  respective  subscriptions  as  follows : 

Fifty  per  cent,  of  the  amount  of  said  subscription  to  the  Treasurer 
of  the  Company  on  demand,  so  soon  as  said  corporation  is  organized, 
and  the  remainder  thereof  in  monthly  instalments  of  ten  per  cent,  of  the 
total  amount  thereof,  payable  on  the  first  day  of  each  and  every  month 
thereafter  until  the  full  amount  of  same  is  paid,  the  conditions  of  such 
subscription  being  as  follows : 

That  not  less  than  One  Hundred  Thousand  Dollars  face  value  of  pre- 
ferred stock  of  the  Company  shall  have  been  subscribed  for  in  good  faith 
on  the  terms  herein  set  forth,  on  or  before  the  date  herein  fixed  for  the 
incorporation  of  said  Company,  and  that  the  said  Midvale  Foundry  Com- 
pany shall  be  incorporated  under  the  laws  of  West  Virginia  not  later  than 
July  i,  1908,  with  a  capital  stock  of  One  Million  Dollars  divided  into 
Ten  Thousand  shares  of  the  par  value  of  One  Hundred  Dollars  each, 
Two  Thousand,  Five  Hundred  shares  of  said  stock  to  be  six  per  cent., 
cumulative  preferred  stock,  and  Seven  Thousand,  Five  Hundred  shares  of 
common  stock;  and  that  with  each  share  of  Preferred  Stock  hereby  sub- 
scribed for  and  paid  for  in  accordance  with  the  terms  of  this  subscrip- 
tion, the  subscriber  shall  receive  as  a  bonus  one  share  of  the  full-paid  and 
non-assessable  Common  Stock  of  the  Company. 

And  if  said  conditions  shall  not  be  fulfilled  in  their  entirety  and  as 
herein  set  forth,  the  subscriptions  of  the  present  agreement  shall  be  null, 
void  and  of  no  effect. 

Charleston,  West  Virginia, 
February  10,  1908. 

NAMES.  ADDRESSES.  SHARES.      AMOUNTS. 

Charles  H.  Morse Norfolk,   Virginia 50  $5,ooo 

Henry  B.  Coles Charleston,  West  Virginia. .  50  5,000 


SUBSCRIPTION    LISTS    AND    CONTRACTS.  347 

The  conditions  of  this  subscription  require  the  bonus  of 
common  stock  to  be  delivered  full-paid  and  non-assessable. 
This  would  usually  be  accomplished,  as  stated  under  Form  20, 
by  the  issuance  of  the  common  stock  in  payment  for  the 
properties  to  be  secured  by  the  company,  with  a  donation  of  a 
portion  of  the  issued  stock  to  the  treasury  of  the  company. 
(See  §210.) 

The  following  subscription  agreement  provides  for  the  pay- 
ment of  the  subscription  in  stock  at  an  agreed  price.  The 
same  form  may,  of  course,  be  used  for  a  subscription  payable 
in  any  other  kind  of  property. 


Form  22. — Subscription  Agreement.   Payable  in  Stock. 

STOCK  SUBSCRIPTION. 


Whereas,  It  is  proposed  to  organize  a  corporation  under  the  laws  of 
the  State  of  New  Jersey,  to  be  known  as  The  Calumet  Coal  and  Coke 
Company,  for  the  purposes  of  mining  and  dealing  in  coal  and  the  manu- 
facture and  sale  of  coal  products,  with  an  authorized  capital  stock  of  Five 
Hundred  Thousand  ($500,000)  Dollars,  divided  into  One  Thousand  (1,000) 
shares  of  the  par  value  of  One  Hundred  ($100)  Dollars  each,  of  which 
Four  Hundred  (400)  shares  shall  be  seven  per  cent.,  cumulative  preferred 
stock,  preferential  as  to  both  dividends  and  assets,  and  Six  Hundred 
(600)  shares  shall  be  common  stock  with  the  exclusive  power  of  voting 
and  participating  in  the  management  of  the  Company. 

Now,  Therefore,  I.  Montague  Von  Helm  the  undersigned,  do  prom- 
ise and  agree  to  and  with  Harvey  DuBois  and  Richard  McLean,  or  the 
survivor  of  them,  Trustees  herein  for  the  securing  subscriptions  and  the 
organization  of  said  corporation,  that  in  consideration  of  the  premises 
and  the  advantages  to  be  derived  from  said  organization,  I  will  take  stock 
in  and  become  a  shareholder  in  such  corporation  to  the  amount  of  Two 
Hundred  (200)  shares  of  the  Common  Stock  of  said  Company  and  Two 
Hundred  (200)  shares  of  the  Preferred  Stock  of  said  Company,  and  will 
pay  for  same  at  its  par  value, 

But,  However,  It  is  understood  and  agreed  that  I  shall  have  the 
privilege  of  paying  my  said  subscription  by  transferring  over  to  the  said 
Calumet  Coal  and  Coke  Company,  Two  Hundred  (200)  shares  of  stock  in 
The  Orchard  Grove  Coal  Company,  at  the  agreed  valuation  of  Two  Hun- 
dred ($200)  Dollars  per  share;  and 

Provided,  That  said  Trustees  shall  secure  bona  fide  subscriptions 
to  the  capital  stock  of  the  said  Calumet  Coal  and  Coke  Company  to  the 
aggregate  amount  of  Four  Hundred  Thousand  ($400,000)  Dollars,  which 
shall  be  the  minimum  amount  with  which  the  said  Company  shall  begin 
business  and  that  such  subscriptions  be  secured  and  such  incorporation 
be  effected  on  or  before  the  3ist  day  of  August,  1908. 

Otherwise  this  subscription  to  be  null  and  void. 


348  FORMS    AND    PRECEDENTS. 

In  Testimony  Whereof,  I  have  hereunto  put  my  hand  and  seal  this 
loth  day  of  March,  A.  D.  1908. 

MONTAGUE  VON  HELM.        [L.  s.] 
Attest : 

HARRY  MACDOUGAL. 

We  hereby  accept  the  foregoing  subscription  and  agree  to  its  terms. 

HARVEY  DuBois, 
RICHARD   MCLEAN, 

Trustees.     . 
Attest : 

HENRY  MCGUERIN. 


CHAPTER  XLVII. 
RECEIPTS  FOR  STOCK  SUBSCRIPTIONS. 


After  incorporation,  payments  of  stock  subscriptions  are 
made  to  the  treasurer  of  the  company  and  receipts  are  issued  by 
him.  If  payments  are  to  be  made  before  incorporation,  a 
trustee  or  trustees  must  necessarily  be  appointed  to  act  for  the 
company.  Such  trustees  are  usually  selected  by  those  having 
charge  of  the  subscription  and  are  named  in  and  made  parties 
to  the  subscription  list. 

Form  23. — Trustee's  Receipt. 

No.  i.  15  Shares. 

LANSFORD  MANUFACTURING  CORPORATION. 

TRUSTEE'S  CERTIFICATE. 
$150.00. 

I  hereby  certify  that  Henry  H.  McGill,  a  subscriber  for  Fifteen 
Shares  of  the  Capital  Stock  of  the  Lansford  Manufacturing  Corporation 
at  its  par  value  of  One  Hundred  Dollars  per  share,  has  paid  to  me  as 
Trustee  for  said  Corporation,  on  account  of  said  subscription  and  in 
accordance  with  its  terms,  the  sum  of  One  Hundred  and  Fifty  Dollars. 

This  receipt  will  upon  the  organization  of  the  said  Lansford  Manu- 
facturing Corporation  be  received  and  credited  by  the  Treasurer  thereof 
to  its  full  amount  as  a  payment  upon  said  subscription. 

New  York,  GERALD  H.  McNELL, 

March  loth,  1908.  Trustee. 


This  receipt  is  usually  printed  and  bound  in  book  form 
with  stub  attached,  perforations  separating  the  two  so  that 
the  receipt  may  be  easily  torn  out  and  given  to  the  party 
making  the  payment.  The  stub  is  the  trustee's  record  of  the 
transaction.  It  should  show  the  number  of  the  receipt,  the 
amount  paid  in,  the  name  of  the  payee,  the  number  of  shares 
subscribed  for,  the  percentage  or  other  details  of  the  instal- 
ment, and  the  date. 

When  instalments  are  paid  after  incorporation,  a  simple 
form  of  treasurer's  receipt  may  be  given  for  each  payment. 

349 


350  FORMS   AND    PRECEDENTS. 

Form  24. — Treasurer's  Receipt  for  Instalment  Payment. 


No.  5.  $150.  5  Shares. 

THE  WILCOX  RADIATOR  COMPANY. 

30    Broad    Street, 

New  York. 

Received  of  Edward  H.  Williamson  the  sum  of  One  Hundred 
Dollars,  instalment  payment  No.  5,  of  Ten  Per  Cent,  upon  his 
subscription  for  Five  Shares  of  the  Capital  Stock  of  The  Wilcox 
Radiator  Company. 

New  York  City,  J.  H.  WILCOX, 

March  I4th,  1908. 


This  receipt  should  also  have  its  stub  upon  which  the  im- 
portant items  are  entered. 

When  payment  is  made  in  full  of  a  stock  subscription,  and 
the  stock  certificates  are  ready  for  delivery,  they  are  in  them- 
selves a  sufficient  receipt.  If  not  ready  for  delivery,  temporary 
certificates  are  frequently  issued  and  are  exchanged  for  the 
permanent  certificates  of  the  company  as  soon  as  the  latter  are 
ready  for  delivery.  These  temporary  certificates  are  in  the 
form  of  the  regular  stock  certificate,  but  are  usually  hastily 
prepared  at  no  greater  expense  than  is  justified  by  their  tem- 
porary nature. 

When  permanent  stock  certificates  are  not  ready  for  deliv- 
ery at  the  time  payments  are  made,  and  temporary  certificates 
are  not  issued,  the  treasurer's  receipt  must  bridge  over  the 
interim.  This  is  usually  more  formal  than  the  ordinary  re- 
ceipt. 

Form  25. — Treasurer's  Receipt  for  Stock  Subscription. 

No.  50.  $1,000.  10  Shares. 

HOWARD  PUBLISHING  COMPANY. 

No.  225  Atlantic  Avenue, 

Brooklyn,    N.    Y. 


This  is  to  certify  that  Harry  H.  Wilson  has  paid  into  the 
Treasury  of  the  Howard  Publishing  Company  the  sum  of  One 
Thousand  Dollars,  payment  in  full  of  his  subscription  for  Ten 
Shares  of  its  Capital  Stock,  duly  executed  Certificates  for  which 
will,  upon  surrender  of  this  Receipt,  be  issued  to  his  order  so  soon 
as  said  Certificates  are  ready  for  delivery. 
March  i4th,  1908.  FRANK  J.  ARDWALD, 

Treasurer. 


RECEIPTS    FOR    STOCK    SUBSCRIPTIONS. 


351 


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At  times  when  payment  of  stock  subscriptions  has  been 
made  'and  neither  permanent  nor  temporary  certificates  are 
ready  for  delivery,  the  president  will  join  with  the  treasurer 
in  the  signature  of  the  treasurer's  receipt  shown  in  Form 
25,  which  then  becomes  in  effect  a  stock  scrip.  The  usual 
form  of  stock  scrip  is,  however,  as  shown  in  Form  26. 
This  scrip  might  or  might  not  be  sealed.  Ordinarily  the 
corporate  seal  is  affixed  and  the  stock  scrip  then  becomes 
practically  a  temporary  certificate. 

Stock  scrip  is  sometimes  employed  when  subscription 
payments  are  made  in  instalments.  The  face  of  the  scrip 
evidences  the  first  instalment,  and  subsequent  instalments 
are  either  endorsed  on  the  back  of  the  scrip  or,  if  personal 
payment  is  impossible,  are  evidenced  by  separate  receipts. 

Where  the  conditions  are  such  as  to  make  payment  in  per- 
son of  the  further  instalments  possible  or  desirable,  the  stock 
scrip  is  ruled  on  the  back  to  permit  of  the  endorsement  of 
these  payments  as  they  are  made,  the  treasurer's  signature 
verifying  each  payment. 

Form  27. — Endorsement  Form  for  Stock  Scrip. 


Date. 

Number  of 
Instalment. 

Amount 
Paid. 

Signature  of  Treasurer. 

April 

2     JQOS 

2 

William  H   Hansford 

May 

2,  1908  

v 

150  oo 

William  H.  Hansford. 

When  this  plan  is  followed,  the  stub  should  also  have 
rulings  to  permit  the  entry  of  payments  and  their  date,  so 
that  both  the  scrip  and  its  stub  will  show  a  complete  record 
of  the  transaction. 

A  subscription  to  stock  and  payments  thereon  are  assign- 
able. A  general  form  of  assignment  to  be  endorsed  upon  the 
back  of  a  receipt  for  subscription  payments,  is  as  follows : 

Form  28. — Assignment  of  Subscription  and  Payments. 

For  Value  Received,  I  hereby  sell,  assign  and  transfer  unto  John  H. 
Wardwell  of  New  York  City  my  subscription  to  Fifteen  Shares  of  the 
Capital  Stock  of  the  Lansford  Manufacturing  Corporation,  together  with 


RECEIPTS    FOR    STOCK   SUBSCRIPTIONS.  358 

the  payments  made  thereon,  all  as  evidenced  by  the  within  certificate, 
and  I  do  hereby  authorize  and  instruct  the  proper  officials  of  said  Com- 
pany upon  completion  of  the  conditions  of  my  said  subscription,  to  issue 
said  stock  to  the  order  of  my  said  assignee. 

New  York,  HENRY  H.  McGiLL. 

May  4th,  1908. 

In  the  presence  of 

SAMUEL  H.  KENNARD. 


CHAPTER    XLVIII. 
STOCK  CERTIFICATES  AND  STOCK  BOOKS. 


The  regular  forms  for  stock  certificates  are  usually  pre- 
pared in  quantity.  The  body  and  general  design  of  the  cer- 
tificate are  lithographed,  blanks  being  left  for  the  variable  data 
such  as  the  name  of  corporation,  capital  stock,  etc.,  etc.  These 
are  filled  in  by  local  printers  at  the  time  the  certificates  are  to 
be  used.  For  this  reason  any  variation  of  the  ordinary  form 
involves  the  preparation  of  a  special  certificate  at  a  consider- 
ably increased  cost.  As  the  wording  of  the  regular  forms 
is  fairly  good,  the  cost  of  a  special  certificate  merely  to  se- 
cure better  wording  is  but  seldom  justified. 

The  certificates  which  follow  are  correct  as  to  wording. 
Two  forms  of  stub  are  given.  The  one  presented  in  connec- 
tion with  Form  30,  "  Preferred  Stock/'  is  the  clearer  and 
better,  but  the  stub  given  in  connection  with  Form  29,  "  Com- 
mon Stock,"  is  so  frequently  supplied  with  the  regular  stock 
certificates  that  it  is  also  presented. 

From  the  legal  standpoint  the  style  of  a  stock  certificate 
does  not  bear  in  any  way  upon  its  effectiveness.  From  the 
business  standpoint,  however,  the  certificate  should  at  least 
be  neat  and  attractive.  Whether  the  highly-colored  and  em- 
bellished stock  certificates  so  frequently  seen  are  desirable,  will 
depend  upon  the  conditions. 

When  the  item  of  cost  is  not  important  or  when  stock  ex- 
change requirements  are  to  be  complied  with,  the  finest  bond 
paper  is  employed  for  stock  certificates  and  the  design  and 
wording  is  engraved  on  steel.  The  cost  then  runs  up  into 
the  hundreds  of  dollars  according  to  the  style  and  number  of 
certificates.  On  the  other  hand,  if  the  issue  is  but  temporary 
or  the  incorporators  indifferent,  the  certificates  are  frequently 
printed  or  even  written  on  ordinary  paper  and  in  plainest  de- 
sign. Usually,  however,  a  good  quality  of  bond  paper  is  em- 

354 


STOCK    CERTIFICATES    AND    STOCK    BOOKS. 


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356  FORMS    AND    PRECEDENTS. 

ployed  with  the  body  and  design  lithographed  and  the  vari- 
able data  printed  in,  the  cost  ranging  from  three  to  five  dol- 
lars per  hundred  for  the  cheaper  forms,  up  to  six  or  eight 
times  this  amount  for  the  better  grades.  A  very  neat,  attrac- 
tive certificate  on  good  bond  paper  with  the  variable  data 
printed  and  the  certificates  numbered  and  bound,  will  cost 
from  five  to  ten  dollars  for  a  book  of  one  hundred  certificates. 

The  name  of  the  company  is  usually  printed  in  full  upon 
the  certificates,  though  the  abbreviation  "  Co."  may  be  em- 
ployed if  desired.  A  seal  is  not  essential  to  the  validity  of 
the  certificate  unless  so  provided  by  charter,  by-law  or  some 
other  competent  authority.  In  practice,  however,  it  is  invari- 
ably affixed. 

In  the  absence  of  statutory  regulation,  any  form  of  seal 
desired  by  the  corporate  authorities  may  be  adopted  and  there- 
by become  the  corporate  seal.  The  usual  and  preferable  form 
consists  of  an  outer  and  inner  circle,  between  which  appears 
the  name  of  the  corporation.  Within  appears  the  year  of  in- 
corporation and  the  name  of  the  State  in  which  the  company 
is  incorporated.  Seals  for  corporate  purposes  are  made  in  a 
variety  of  styles,  ranging  in  cost  from  $1.50  up.  A  good,  or- 
dinary seal  should  be  secured  for  from  two  to  three  dollars. 

When  certificates  for  preferred  stock  are  prepared,  the 
conditions  of  issue  should  be  set  out  in  full  on  the  face  of  the 
certificate,  though,  if  lengthy,  the  certificate  may  merely  em- 
body the  more  important  provisions,  and  reference  be  made 
on  the  certificate  to  the  charter,  the  by-law  or  the  resolution 
under  which  the  stock  is  issued. 

In  any  such  case  the  wording  of  Form  24  would  be  follow- 
ed to  the  end  of  the  first  paragraph.  The  next  paragraph 
would  then  read  as  follows : 

"  The  preferred  stock  represented  by  this  certificate 
is  authorized  by  the  Certificate  of  Incorporation  of  the  said 
Company  as  filed  in  the  office  of  the  Secretary  of  State  of 
New  York  on  the  first  clay  of  March,  1908,  and  is  issued 
under  the  terms  and  conditions  therein  set  forth." 

In  some  few  states  the  statutes  prescribe  that  the  condi- 
tions of  preferred  stock  must  appear  with  greater  or  less  ful- 
ness on  the  face  of  the  certificate. 

Preferred  stock  is  sometimes  issued  in  very  crude  form, 
"  Preferred  Stock  "  being  printed  across  the  face  of  the  or- 
dinary certificate  in  red  or  some  other  distinctive  style,  fol- 


STOCK    CERTIFICATES    AND    STOCK    BOOKS. 


357 


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lowed  by  the  conditions  under  which  the  preferred  stock  is 
issued. 

Preferred  stock  certificates  are  numbered  independently  of 
the  common  stock  certificates.  That  is,  the  first  certificate  of 
preferred  stock  is  numbered  "  i  "  regardless  of  the  fact  that 
the  first  certificate  of  common  stock  is  also  numbered  "  i," 
the  two  series  being-  sufficiently  distinguished  by  the  fact  that 
they  are  respectively  common  and  preferred  stock. 

Sometimes  stock  is  held  by  trustees  under  the  terms  of  a 
voting  trust  agreement.  (See  Forms  13,  14.)  When  the  trust 
is  formed  the  certificates  of  stock  to  be  held  under  it  are 
duly  assigned  and  are  turned  in  to  the  trustees,  who  surrender 
them  for  cancellation  and  take  out  certificates  in  their  own 
names  as  voting  trustees. 

Voting  trustees'  certificates  are  then  usually  prepared  in 
the  general  style  of  the  ordinary  stock  certificate  and  are  de- 
livered to  the  parties  to  whom  the  stock  belongs  to  evidence 
its  real  ownership.  These  trustees'  certificates  pass  by  assign- 
ment, the  equitable  ownership  of  the  stock  being  thereby  vest- 
ed in  the  assignee.  The  following  form  gives  the  general 
wording  of  a  voting  trustees'  certificate. 

Form  31. — Voting  Trustees'  Certificate. 


Organized  under  the  Laws  of  the  State  of  Maine. 

TELEPOST  COMPANY. 
Capital  Stock,  $18,000,000. 


Number  Shares. 

TELEPOST  COMPANY. 


Certificate  for  Stock  Deposited 
Under  Voting  Trust  Agreement  of  April  12,  1907. 


John  W.  Goff,  S.  S.  McClure,  H.  D.  Critchfield,  F.  W.  Shumaker  and 
H.  Lee  Sellers,  Trustees,  by  the  Lincoln  Trust  Company,  their  agent, 
having  received  on  deposit  the  entire  capital  stock  of  the  Telepost  Com- 
pany, full  paid  and  non-assessable,  all  being  held  under  the  above-named 
agreement,  to  the  terms  of  which  the  holder  hereof  assents  by  receiving 

this  certificate,  Certify  that  is  entitled, 

subject  to  the  provisions  of  said  Agreement,  to 

shares  of  the  stock  deposited  thereunder.  This  Cer- 
tificate entitles  the  holder  to  all  rights,  dividends  and  privileges  belonging 
to  the  actual  stock,  excepting  only  the  right  to  vote.  The  Trusteeship 
herein  agreed  to  may  be  terminated  after  three  years  upon  terms  set  forth 
in  the  above-named  agreement  and  is  ended  by  limitation  in  ten  years  from 
date  of  agreement. 


STOCK    CERTIFICATES    AND    STOCK    BOOKS.  359 

Transferable  only  on  the  books  of  the  undersigned  at  the  office  of  the 
Lincoln  Trust  Company,  New  York  City,  by  the  holder  hereof  in  person 
or  by  duly  authorized  attorney,  upon  surrender  of  this  certificate  properly 
endorsed. 

Dated, ,  19... 

JOHN  W.  GOFF, 
H.  D.  CRITCH FIELD, 
H.  LEE  SELLERS, 
S.  S.  MCCLURE, 
F.  W.  SHUMAKER, 

Trustees. 
By  LINCOLN  TRUST  COMPANY, 

Depositary   and   Agent. 

By   

Secretary 
Treasurer. 


The  form  of  assignment  on  the  back  of  this  certificate  is 
as  follows : 
Form  32. — Assignment  of  Voting  Trustees'  Certificate. 

For  Value  Received    hereby  sell,  assign  and 

transfer  to    the  interest   in  the   stock  of  the 

Telepost  Company   represented  by  the  within  certificate,  and  do  hereby 

irrevocably  constitute  and  appoint   attorney  to 

transfer  the  said  interest  on  the  books  of  the  within  named  Trustees  with 
full  powers  of  substitution  in  the  premises. 

Dated,  ,  19...          :.. 

Stock  is  transferred  by  a  similar  assignment,  the  form 
'being  placed  upon  the  back  of  the  certificate.  There  is  but 
one  form  of  this  assignment  in  common  use,  which,  though 
rather  informal  and  incomplete  in  some  respects,  is  almost 
invariably  employed.  When  this  assignment  is  duly  executed 
by  the  owner  of  record  of  the  certificate,  the  certificate  and 
the  stock  represented  thereby  become  the  property  of  the  party 
named  in  the  assignment  form.  If  this  party  wishes  to  assign 
the  certificate  again,  he  might  execute  another  similar  assign- 
ment, either  written  on  the  back  of  the  certificate,  or  prepared 
as  a  separate  document  and  attached  to  the  certificate,  but, 
as  is  usually  done,  would  probably  surrender  the  certificate 
and  take  out  a  new  one  in  his  own  name,  or  in  the  name  of 
the  party  to  whom  he  wishes  the  stock  to  be  transferred. 

Or,  the  assignment  might  be  duly  executed,  but  the  blanks 
not  be  filled  in  at  all.  The  certificate  is  then  said  to  be  assigned 
in  blank  and  may  be  passed  from  hand  to  hand  without  fur- 


360  FORMS    AND    PRECEDENTS. 

ther  formality,  the  ownership  of  the  stock  following  the  cer- 
tificate. Any  owner  who  wishes  to  make  himself  a  stockholder 
of  record,  i.  e.,  appear  upon  the  stock  books  of  the  company  as 
the  owner  of  the  stock,  may  then  fill  out  the  blanks  in  the 
assignment,  turn  the  certificate  in  to  the  secretary  of  the  com- 
pany for  cancellation,  and  receive  a  new  certificate  in  his  own 
name. 

The  following  assignment  is  complete,  the  parts  which 
have  been  filled  in  being  indicated  by  parentheses : 

Form  33. — Assignment  of  Stock  Certificate. 

For  Value  Received,  (I)  hereby  sell  and  transfer  unto  (John  J.  Mc- 
Millan of  New  York  City,  Twenty-five)  Shares  of  the  Capital  Stock 
represented  by  the  within  Certificate,  and  do  hereby  irrevocably  constitute 
and  appoint  (Harry  S.  Gunnison)  my  Attorney  to  transfer  the  said  stock 
on  the  books  of  the  within  named  Company  with  full  power  of  substitu- 
tion in  the  premises. 

Dated  (March  2nd,  1908.)  (HOWARD  S.  ALLEN.) 

In  presence  of 

(ANNA  H.  MCCLELLAND.) 

Usually  the  name  of  the  secretary  of  the  company  is  in- 
serted as  the  attorney  who  is  to  make  the  transfer  on  the  books 
of  the  company,  though  any  other  suitable  person  might  be 
named  instead. 

STOCK  BOOKS. 

The  usual  stock  books  are  the  transfer  hook  and  the  stock 
ledger,  this  latter  being  also  frequently  referred  to  as  the  stock 
book.  (See§  136.) 

Form  34. —  Stock  Transfer  Book. 

Ledger  Folio  27.  Transfer  No.  556. 

ALLIANCE  AUTOMOBILE  COMPANY. 


For  Value  Received,  I  hereby  sell,  assign  and  transfer  to  John  H. 
Lansing  of  Newark,  New  Jersey,  Seventy-six  Shares  of  the  Capital  Stock 
of  the  above-mentioned  Company  now  standing  in  my  name  on  the  Com- 
pany books  and  represented  by  surrendered  Certificates  Nos.  32,  37  and  44- 

Witness  my  hand  and  seal  this  28th  day  of  February,  1908. 

GEORGE  B.  GOLDMAN.  [L.  s.] 

By   GEORGE   GALE,  Attorney, 
New  Certificate  No.  224 
Issued  to  John  H.  Lansing 
Ledger  Folio  84. 


STOCK    CERTIFICATES    AND    STOCK    BOOKS.  '     361 

The  transfer  book  is  practically  a  duplication  of  the  as- 
signment appearing  upon  the  stock  certificates,  and  in  many 
corporations  is  not  kept  at  all,  the  duly  executed  assignment 
on  the  back  of  the  certificate  being  regarded  as  all  sufficient 
authorization  for  the  transfer  of  the  assigned  stock. 

The  transfer  books  supplied  by  stationers  usually  have  a 
stub  attached  to  the  transfer.  As  the  transfer  itself  remains 
in  the  book,  this  stub  is  merely  an  unnecessary  repetition  of 
matter  already  shown  on  the  transfer. 

The  signature  to  the  assignment  of  the  stock  transfer  book 
is  sometimes  witnessed.  This  signature  is,  however,  usually 
that  of  the  secretary  or  the  transfer  agent,  or  is  affixed  in 
their  presence,  and,  as  the  assignment  is  at  the  most  but  sup- 
plementary to  the  duly  witnessed  assignment  on  the  back  of 
the  surrendered  certificate,  a  witness  to  its  signature  is  gen- 
erally regarded  as  superfluous. 

In  many  states  of  the  Union  a  stock  book  or  stock  ledger 
— the  two  being  practically  synonymous — is  required  by  the 
state  statutes.  Whether  required  by  the  statutes  or  not,  some 
book  of  the  kind  must  necessarily  be  kept  in  order  to  provide 
an  accurate  record  of  the  issued  and  outstanding  stock  of 
the  company.  The  form  of  stock  book  or  stock  ledger  shown 
in  Form  29  will  bq  found  convenient  and  will  probably  meet 
the  requirements  of  the  statutes  in  every  state  of  the  Union. 

The  leaves  of  this  book  are  indexed,  usually  as  a  matter 
of  convenience,  but  in  the  State  of  New  York  to  secure  the 
alphabetical  arrangement  required  by  statute.  The  name  and 
address  of  the  stockholder  with  whom  the  particular  account 
is  kept  appears  at  the  head  of  the  page  as  in  an  ordinary 
ledger.  On  the  right-hand  side  of  the  page  the  party  is 
credited  with  the  stock  he  purchases  or  otherwise  acquires, 
and  on  the  left-hand  side  is  debited  with  any  stock  disposed 
of.  The  difference  between  the  two  sides  shows  at  any  time 
the  amount  of  stock  standing  to  his  credit. 

On  the  debit  or  sale  side  of  the  account,  the  first  column 
gives  the  date  of  the  transaction ;  the  second  the  name  of  the 
party  to  whom  the  stock  is  transferred ;  the  third  the  number 
of  the  surrendered  certificate;  the  fourth  the  number  of  the 
certificate  reissued  to  the  transferrer  when  but  a  portion  of  the 
stock  represented  by  the  surrendered  certificate  is  sold,  and  the 
fifth  column  shows  the  number  of  shares  sold. 


362  FORMS    AND    PRECEDENTS. 

Form  35. — Stock  Book  or  Stock  Ledger. 


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STOCK    CERTIFICATES    AND    STOCK    BOOKS.  363 

On  the  credit  side,  which  shows  stock  acquired  by  the 
party  with  whom  the  account  is  kept,  the  first  column  gives 
the  date  of  purchase;  the  second  the  name  of  the  party  as- 
signing the  purchased  stock;  the  third  shows  what  amount  has 
been  paid  on  the  stock  thereby  indicating  whether  it  is  full 
paid  or  otherwise;  the  fourth  column  gives  the  numbers  of 
the  certificates  issued  to  the  party,  and  the  last  column  the 
number  of  shares  acquired. 

Where  a  number  of  certificates  are  issued  or  cancelled  in 
a  single  transaction,  the  entry  will  vary  according  to  the  con- 
ditions. If  but  a  few  certificate  numbers  are  involved,  they 
may  usually  be  entered  in  small  figures  on  the  line  in  the 
proper  column.  If  the  numbers  of  certificates  are  too  great  to 
be  so  entered,  two  or  more  lines  may  be  devoted  to  the  trans- 
action, or  the  numbers  may  be  noted  at  the  bottom  of  the 
page,  reference  to  these  numbers  being  inserted  in  the  column 
where  the  numbers  ordinarily  appear.  If,  however,  the  cer- 
tificates cancelled  or  issued  are  in  different  names,  one  line 
must  necessarily  be  given  for  each  certificate. 


CHAPTER  XLIX. 
FIRST     MEETINGS. 


The  general  subject  of  the  first  or  organization  meetings  of 
corporations  is  discussed  at  length  in  Chapters  XXX.  and 
XXXI.  of  the  present  volume.  The  forms  of  the  present 
chapter  are  supplementary  thereto. 

In  most  states  of  the  Union  the  first  directors  of  a  cor- 
poration are  elected  by  the  stockholders,  and  when  a  corpora- 
tion is  organized  a  stockholders'  meeting  must  of  necessity 
precede  the  directors'  meeting.  In  some  states,  however,  as 
in  New  York,  Colorado  and  California,  the  first  directors  are 
appointed  by  the  charter,  and  in  such  states  the  first  meeting 
of  stockholders  loses  much  of  its  importance,  particularly 
when  the  directors  have  power  to  adopt  by-laws.  In  such  case 
it  may  or  may  not  precede  the  first  meeting  of  directors  at 
the  discretion  of  the  incorporators. 

Usually  at  the  first  meeting  of  stockholders,  the  charter  is 
to  be  received,  by-laws  adopted,  directors  to  be  elected,  other 
details  of  organization  to  be  provided  for,  and,  as  almost  in- 
variably property  of  some  kind  is  to  be  taken  over  or  pur- 
chased by  the  new  corporation,  the  stockholders  pass  a  reso- 
lution authorizing  the  directors  thereto. 

At  the  first  meeting  of  directors,  which  usually  immedi- 
ately follows  the  first  meeting  of  stockholders,  officers  are  to 
be  elected,  and  various  details  connected  with  the  commence- 
ment of  the  corporate  business  are  to  be  attended  to,  including 
the  taking  over  or  purchase  of  property  to  be  acquired  by  the 
new  corporation. 

The  procedure  at  the  first  corporate  meetings  varies  ac- 
cording to  the  requirements  of  the  particular  state.  In  the 
great  majority  of  states  the  first  meeting  of  stockholders  must 
be  held  within  the  state.  If  all  or  a  majority  of  the  incor- 
porators reside  outside  the  state  of  incorporation — a  condition 
which  frequently  arises — the  requirement  that  the  first  meeting 
of  stockholders  must  be  held  within  the  home  state  is  com- 

364 


FIRST    MEETINGS.  365 

plied  with  by  means  of  proxies.  The  non-resident  incor- 
porators  send  their  proxies  to  the  attorney  or  other  agent  who 
represents  the  company  within  the  state  in  which  the  corpora- 
tion is  to  be  formed,  who  thereupon  holds  the  first  meeting 
of  stockholders,  transacts  all  necessary  business,  complies  with 
all  the  legal  requirements,  prepares  the  proper  minutes  of  the 
meeting,  has  them  duly  signed  by  the  acting  president  and 
secretary  of  the  meeting,  and  turns  the  minutes  and  the  com- 
pany over  to  its  "  incorporators  "  legally  qualified  to  conduct 
its  business.  Such  meetings,  though  purely  formal,  are  per- 
fectly legal. 

The  following  minutes  of  first  meetings  are  drawn  in  com- 
pliance with  the  laws  of  New  Jersey.  They  may  be  easily 
adapted  to  the  requirements  of  any  other  state. 

Form  36. — Minutes.     Stockholders'. 


THE  IMPERIAL  GAS  STOVE  COMPANY 
OF  NEW  JERSEY. 

MINUTES  OF  FIRST  MEETING  OF  STOCKHOLDERS. 
Held  February  5,  1908. 


Pursuant  to  written  call  and  waiver  of  notice  signed  by  all  of  the  in- 
corporators, the  first  meeting  of  stockholders  of  The  Imperial  Gas  Stove 
Company  was  held  in  the  office  of  Harvey  K.  Wilson,  No.  24  Morris  Street, 
Newark,  New  Jersey,  at  3  P.  M.,  on  the  5th  day  of  February,  1908. 

There  were  present  in  person : 
GEORGE  P.  GOFF, 
W.  S.  PHILLIPS, 
SIDNEY  F.  HORNER, 
WARREN  CALVERT. 

There  was  present  by  proxy: 
MARTIN  COLEMAN. 

Mr.  Sidney  F.  Horner  called  the  meeting  to  order  and  on  motion, 
Mr.  George  P.  Goff  was  elected  Chairman  and  Mr.  Warren  Calvert  was 
appointed  Secretary  of  the  meeting. 

The  Secretary  presented  and  read  the  call  and  waiver  of  notice  pur- 
suant to  which  the  meeting  was  held.  On  motion  it  was  ordered  to  be  en- 
tered in  the  minute  book  following  the  minutes  of  the  meeting.  (See 

The  proxy  of  Mr.  Martin  Coleman  appointing  George  P.  Goff  his 
representative  was  presented,  and  no  objection  being  made  was  ordered 
to  be  entered  in  the  minute  book  following  the  minutes  of  the  meeting. 


366  FORMS    AND    PRECEDENTS. 

The  Chairman  presented  a  copy  of  the  Certificate  of  Incorporation 
and  stated  that  the  original  had  been  recorded  in  the  office  of  the  Clerk 
of  Essex  County  on  the  3d  day  of  February,  1908,  and  was  filed  in  the 
office  of  the  Secretary  of  State  at  Trenton,  on  the  4th  day  of  February, 
1908.  On  motion  it  was  ordered  that  the  said  Certificate  of  Incorporation 
be  entered  on  the  first  pages  of  the  Book  of  Minutes.  (See  Forms  1-7.) 

The  Secretary  presented  a  form  of  By-laws  prepared  by  Counsel  for 
the  Company,  which  was  read  article  by  article  and  as  a  whole  unani- 
mously adopted  and  was  ordered  to  be  entered  in  the  Book  of  Minutes 
immediately  following  the  Certificate  of  Incorporation.  (See  Forms  8-10.) 

The  Chairman  announced  that  the  next  business  in  order  was  the 
election  of  five  directors  as  provided  in  the  by-laws  and  thereupon  ap- 
pointed Messrs.  Thomas  Felton  and  Charles  C.  Kendall  inspectors.  Said 
inspectors  were  duly  sworn  and  proceeded  to  open  the  polls  and  receive 
ballots.  All  the  stockholders  present  in  person  or  by  proxy  having  voted, 
the  inspectors  reported  that  ballots  were  cast  as  follows  : 

For  Directors.  Votes. 

George  P.  Goff  .  5 

W.  S.   Phillips    5 

Sidney  F.  Homer   5 

Warren  Calvert    5 

Martin  Coleman  5 

and  that  the  gentlemen  named  were  therefore  the  duly  elected  directors 
of  the  Company.  It  was  ordered  that  the  oath  and  report  of  the  in- 
spectors be  entered  in  the  Minute  Book  following  the  minutes  of  the 
meeting.  (See  Form  39.) 

On  motion  duly  made  'and  seconded,  the  following  resolution  was 
unanimously  adopted: 

Resolved,  That  the  principal  office  of  the  Company  in  the  State  of 
New  Jersey  shall  be  at  No.  24  Morris  Street,  Newark,  and  the  agent  in 
charge  upon  whom  process  may  be  served,  shall  be  Harvey  K.  Wilson. 

The  Secretary  presented  and  read  a  waiver  of  notice  of  assessments 
and  of  the  time  and  place  of  payment  thereof,  signed  by  all  the  in- 
corporators.  The  waiver  was  ordered  to  be  entered  in  the  Minute  Book 
following  the  minutes  of  the  meeting.  (See  Form  40.) 

The  Secretary  presented  a  proposal  from  Richard  White,  of  South 
Orange,  New  Jersey,  offering  to  assign  to  the  Company  in  exchange  for 
its  entire  common  stock,  the  United  States  letters  patent  granted  to  him 
for  Improvements  in  Gas  Heating  Apparatus,  together  with  his  agree- 
ment to  assign  to  the  Company  any  future  inventions  or  improvements 
made  by  him  in  Gas  Heating  Apparatus. 

Said  proposal  was  ordered  received  and  the  following  resolution  in 
regard  thereto  was  moved,  seconded  and  unanimously  adopted : 

Whereas,  Richard  White,  for  and  in  consideration  of  the  issue  to 
his  order  of  the  entire  common  stock  of  this  Company  of  the  par  value 
of  One  Hundred  Thousand  ($100,000)  Dollars,  has  offered  to  sell  and 
assign  to  this  Company  the  United  States  rights  for  his  Improvements 
in  Gas  Heating  Apparatus,  together  with  his  agreement  to  assign  to  the 
Company  all  future  improvements  and  inventions  in  Gas  Heating  Ap- 
paratus, all  as  set  forth  in  his  written  proposal  submitted  to  this  meet- 
ing; and 

Whereas,  It  appears  to  the  stockholders  of  this  Company  that  such 
property  is  necessary  for  the  business  and  lawful  purposes  of  the  Com- 
pany, and  that  the  same  is  of  the  reasonable  value  of  One  Hundred 
Thousand  ($100,000)  Dollars : 

Now,  Therefore,  Be  it  Resolved,  That  the  Board  of  Directors  of  this 
Company  be  and  hereby  are  authorized  and  empowered  and  directed  to 


FIRST  MEETINGS.  367 

accept  the  said  proposition  and  to  issue  the  said  common  stock  of  this 
Company  in  exchange  for  the  said  letters  patent  and  agreement  of  the 
said  Richard  White. 

There  being  no  further  business,  the  meeting  was  declared  adjourned. 
GEORGE  P.  GOFF,  WARREN  CALVERT, 

Chairman.  Secretary. 

In  pursuance  of  the  motions  of  the  preceding  minutes,  the  following 
forms  are  entered  in  the  minutes : 

(1)  Certificate  of  Incorporation. 

(2)  By-Laws. 

(3)  Call  and  Waiver  of  Notice. 

(4)  Proxy  of  Martin  Coleman. 

(5)  Oath  and  Report  of  Inspectors  of  Election. 

(6)  Waiver  of  Notice  of  Assessment. 

WARREN   CALVERT, 
Secretary. 

Instruments  received  and  filed  during  the  course  of  a  meet- 
ing are  frequently  ordered  embodied  in  the  minutes  instead  of 
following  them.  There  is  no  legal  objection  to  either  arrange- 
ment. The  minutes  are,  however,  clearer  and  more  closely 
connected  when  the  instruments  are  appended  instead  of  being 
interpolated  in  the  body  of  the  minutes. 

Form  37. — Call  and  Waiver  of  Notice.     Stockholders*. 
THE  IMPERIAL  GAS  STOVE  COMPANY. 


CALL  AND  WAIVER  OF  NOTICE 

FOR 
FIRST  MEETING  OF  STOCKHOLDERS 


We,  the  undersigned,  being  all  of  the  incorporators  of  the  above- 
named  corporation  and  all  of  the  subscribers  to  its  capital  stock  entitled 
to  notice  of  said  meeting,  do  hereby  call  the  first  meeting  of  the  stock- 
holders of  said  corporation  to  be  held  in  the  office  of  Harvey  K.  Wilson, 
No.  24  Morris  Street,  Newark,  New  Jersey,  at  3  P.  M.,  on  the  5th  day 
of  February,  1908,  for  the  purpose  of  receiving  charter,  adopting  by-laws, 
electing  directors,  considering  and  acting  upon  a  proposal  for  the  issue 
of  the  capital  stock  of  the  corporation  in  exchange  for  property,  and 
the  transaction  of  all  such  other  business  as  may  be  necessary  or  con- 
venient in  connection  with  the  organization  of  said  corporation,  and  we 
do  hereby  waive  all  requirements  as  to  notice  or  publication  of  the  time, 
place  and  purposes  of  this  first  meeting  and  do  consent  to  the  trans- 
action thereat  of  any  and  all  business  pertaining  to  the  affairs  of  the 
Company. 

Dated  Newark,  N.  J.,  February  4,  1908. 

GEORGE  P.  GOFF, 
W.  S.  PHILLIPS, 
SIDNEY  F.   HORNER, 
WARREN  CALVERT, 
MARTIN   COLEMAN. 


000  FORMS    AND    PRECEDENTS. 

This  call  and  waiver  must  be  signed  by  every  person  en- 
titled to  be  present  at  the  meeting,  although  the  presence  of  any 
person  not  signing  the  waiver  would  be  held  in  itself  to  be  a 
waiver  of  notice  and  an  acceptance  of  the  call. 

Form  38. — Proxy. 

THE  IMPERIAL  GAS  STOVE  COMPANY. 


PROXY 

FOR 

FIRST  STOCKHOLDERS'  MEETING 


Know  All  Men  By  These  Presents, 

That  I,  the  undersigned,  one  of  the  incorporators  and  a  subscriber  to 
the  stock  of  the  above-named  corporation,  do  hereby  constitute  and  appoint 
George  P.  Goff,  my  true  and  lawful  attorney,  with  full  powers  of  substi- 
tution and  revocation,  to  represent  me  at  the  first  meeting  of  the  stock- 
holders of  said  corporation  to  be  held  on  the  5th  day  of  February,  1908, 
and  at  any  meeting  postponed  or  adjourned  therefrom,  hereby  granting 
my  said  attorney  full  power  and  authority  to  act  for  me  at  said  meeting, 
and,  in  my  name,  place  and  stead,  to  vote  thereat  upon  the  stock  of  said 
corporation  subscribed  for  by  me,  or  upon  which  I  may  then  be  entitled 
to  vote,  in  the  election  of  directors  and  in  the  transaction  of  any  and  all 
other  business  pertaining  to  the  affairs  of  the  Company  that  may  be 
brought  before  said  meeting,  all  as  fully  as  I  might  or  could  do  if  per- 
sonally present,  and  I  hereby  ratify  and  confirm  all  that  my  said  attorney, 
or  his  substitute,  shall  lawfully  do  at  such  meeting  in  my  name,  place  and 
stead. 

In  Witness  Whereof,  I  have  hereunto  affixed  my  signature  and 
seal,  this  4th  day  of  February,  1908. 

In  presence  of  MARTIN  COLEMAN.       [L.  s.] 

PATRICK   SULLIVAN. 


Form  39. — Inspectors'  Oath  and  Report. 


INSPECTORS'  OATH  AND  REPORT. 

STATE  OF   NEW  JERSEY,  j 
County   of   Essex,       )  ss" 

We,  the  undersigned,  the  duly  appointed  Inspectors  of  Election  of  the 
Imperial  Gas  Stove  Company,  being  severally  sworn,  upon  our  respective 
oaths,  do  undertake  and  swear  that  we  will  faithfully,  honestly  and  im- 
partially perform  our  duties  as  Inspectors  at  the  election  of  directors  of 
said  Company,  to  be  held  this  5th  day  of  February,  1908,  and  that  we 
will  make  a  true  report  of  the  results  of  said  election. 

THOMAS   FELTON, 
CHARLES  C.  KENDALL. 
Subscribed    and    sworn    to    before    me 
this  5th .  day  of  February,   1908. 

FERGUS  K.  WILLIE, 

Notary  Public. 


FIRST   MEETINGS.  369 

We,  the  undersigned,  Inspectors  of  Election,  duly  appointed  to  con- 
duct the  election  for  directors  of  the  Imperial  Gas  Stove  Company  at 
the  meeting  of  the  stockholders  thereof,  held  this  date  at  the  office  of 
the  Company,  No.  24  Morris  Street,  Newark,  New  Jersey,  do  hereby 
certify  and  'report  that  we  being  first  duly  sworn  by  oath  hereunto 
annexed,  did  hold  and  conduct  the  said  election  by  ballot  in  due  form 
and  that  the  votes  cast  thereat  are  as  follows: 

Votes 
Names.  Received. 

George  P.   Goff    5 

W.   S.   Phillips 5 

Sidney  F.  Horner   5 

Warren    Calvert    5 

Martin    Coleman    5 

Newark,   New  Jersey,  THOMAS  FELTON, 

February"  5th,  1908.  CHARLES  C.  KENDALL. 


In  New  York  the  oath  and  certificate  of  inspectors  of 
election  must  be  filed  in  the  office  of  the  county  clerk.  In 
New  Jersey  this  is  not  required,  nor  need  the  inspectors  be 
sworn. 

In  the  majority  of  the  states  inspectors  of  election  are  not 
required  by  law.  They  are,  however,  usually  appointed  in 
order  to  secure  the  proper  conduct  of  the  election  and  a  formal 
report  of  its  results.  The  foregoing  form  will  serve  in  any 
such  cases,  the  oath  being  omitted  if  not  deemed  necessary. 

Form  40. — Waiver  of  Notice  of  Assessment. 

WAIVER  OF  NOTICE  OF  ASSESSMENT. 


We,  the  undersigned,  subscribers  to  the  Capital  Stock  of  the  Imperial 
Gas  Stove  Company  of  New  Jersey,  hereby  waive  notice  of  the  time 
and  place  of  payment  of  our  respective  subscriptions  to  the  Capital  Stock 
with  which  said  Company  begins  business,  and  also  waive  all  other  re- 
quirements of  the  laws  of  New  Jersey  as  to  notice  of  assessment  and 
payment  thereof,  and  we  agree  to  pay  our  respective  subscriptions  to  the 
Treasurer  of  the  Company  in  such  amounts  and  at  such  times  as  the 
Board  of  Directors  may  require. 

Newark,  New  Jersey,  GEORGE  P.  GOFF., 

February  5th,  1908.  W.   S.   PHILLIPS, 

SIDNEY  F.   HORNER, 
WARREN   CALVERT, 
MARTIN   COLEMAN. 

This  form  is  purely  local.  If  not  adopted,  thirty  days' 
notice  must  be  given  the  incorporators  before  their  subscrip- 
tions can  be  enforced  under  the  laws  of  New  Jersey. 

The  first  meeting  of  directors  usually  follows  immediately 
after  the  first  meeting  of  stockholders,  its  precise  date  or  time 


370  FORMS    AND  PRECEDENTS. 

being  fixed  by  the  call  and  waiver  of  notice  signed  by  the 
newly  elected  directors.  Unless  notice  is  waived  by  all  of  the 
newly  elected  directors,  the  first  meeting  of  directors  is  called 
as  a  special  meeting  in  accordance  with  the  requirements  of 
the  by-laws  of  the  company  or  otherwise  the  directors  wait 
until  the  time  fixed  by  the  by-laws  for  their  first  regular 
meeting. 

Form  41. — Minutes.    Directors'. 

IMPERIAL  GAS  STOVE  COMPANY 
OF  NEW  JERSEY. 


MINUTES  OF  FIRST  MEETING  OF  DIRECTORS 
Held   February   5th,    1908. 


Pursuant  to  written  call  and  waiver  of  notice  the  Board  of  Directors 
of  the  Imperial  Gas  Stove  Company  held  its  first  meeting  in  the  office 
of  Harvey  K.  Wilson,  No.  24  Morris  Street,  Newark,  New  Jersey,  at 
4  P.  M.,  on  the  5th  day  of  February,  1908. 

There  were  present: 
George  P.  Goff, 
W.   S.   Phillips, 
Sidney  F.  Horner, 
Warren  Calvert, 

constituting  a  quorum  of  the  Board.     Absent:  Martin  Coleman. 

The  Secretary  presented  the  call  and  waiver  of  notice  signed  by  all 
the  Directors,  pursuant  to  which  the  meeting  was  held.  It  was  ordered 
spread  upon  the  Minute  Book  immediately  following  the  minutes  of  the 
meeting.  (See  Form  42.) 

The  Chairman  announced  the  first  business  in  order  to  be  the  election 
of  officers  to  serve  for  the  remainder  of  the  corporate  year  and  until 
the  election  of  their  successors,  and  appointed  Messrs.  Harvey  K.  Wilson 
and  Warren  Calvert  tellers  to  conduct  the  election.  The  votes  of  those 
present  were  duly  cast  by  ballot,  resulting  in  the  unanimous  election  of 
the  following  officers : 

President GEORGE  P.  GOFF, 

Vice- President MARTIN    COLEMAN, 

Secretary WARREN    CALVERT, 

Treasurer W.   S.   PHILLIPS. 

It  was  ordered  that  the  Secretary  be  sworn  and  subscribe  a  written 
oath^  of  office,  and  that  said  oath  be  spread  upon  the  Minute  Book  im- 
mediately following  the  minutes  of  the  present  meeting.  The  Secre- 
tary thereupon  took  said  oath  and  entered  upon  the  discharge  of  his 
duties.  (See  Form  43.) 

It  was  ordered  that  the  Treasurer  give  bond  as  provided  in  the  by- 
laws, in  the  sum  of  Five  Thousand  ($5,000)  Dollars,  the  form  and 
sureties  of  same  to  be  approved  by  the  Board  of  Directors.  The  Treas- 
urer thereupon  submitted  a  bond  signed  by  himself  as  principal  and  by 
the  Fidelity  Surety  Company  of  Maryland  as  surety.  The  bond  as  pre- 


FIRST  MEETINGS.  371 

sented  was  approved  and  ordered  to  be  filed  in  the  custody  of  the  Secre- 
tary of  the  Company. 

Upon  motion  duly  made  and  seconded  the  following  resolutions  were 
unanimously  adopted : 

Resolved,  That  the  officers  of  the  Company  be  authorized  to  lease 
an  office  for  the  use  of  the  Company  at  No.  30  Broad  Street,  New  York 
City,  the  rental  thereof  not  to  exceed  Eighty  ($80)  Dollars  per  month, 
and  that  the  meetings  of  the  Board  of  Directors  be  from  time  to  time 
held  there  or  at  the  designated  office  of  the  Company  in  the  State  of 
New  Jersey  as  the  Board  of  Directors  may  appoint. 

Resolved,  That  the  Treasurer  be  and  hereby  is  authorized  and  in- 
structed to  open  an  account  for  the  Company  with  the  Seaboard  Nat- 
ional Bank  of  New  York  City,  and  to  deposit  therein  all  funds  of  the 
Company  coming  into  his  possession,  such  account  to  be  in  the  name  of 
the  Company  and  funds  deposited  therein  to  be  withdrawn  only  by  check 
signed  by  the  Treasurer  and  countersigned  by  the  President. 

Resolved,  That  certificates  for  common  and  preferred  stock  as  sub- 
mitted to  the  Board  and  identified  by  the  signature  of  the  President,  be 
and  hereby  are  adopted  as  the  stock  certificates  of  the  Company,  and 
that  the  same  be  attached  to  the  pages  of  the  Minute  Book  immediately 
following  the  minutes  of  the  present  meeting. 

Resolved,  That  the  Secretary  be  instructed  to  procure  Five  Hundred 
(500)  certificates  of  common  stock  and  Five  Hundred  (500)  certificates 
of  preferred  stock  in  form  as  adopted,  also  a  corporate  seal  as  provided 
in  the  by-laws,  and  in  addition  thereto  such  records,  stock  and  transfer 
books,  books  of  account  and  stationery  and  office  supplies  as  may  be  nec- 
essary for  the  proper  conduct  of  the  Company's  operations  and  business. 
Resolved,  That  the  Treasurer  be  hereby  authorized  and  instructed 
to  pay  from  the  Company  funds  all  expenses  properly  incurred  in  con- 
nection with  the  incorporation  of  the  Company,  the  total  of  such  pay- 
ments not  to  exceed  Three  Hundred  ($300)  Dollars. 

Resolved,  That  an  assessment  of  One  Hundred  (100)  Per  Cent, 
be  levied  upon  the  shares  of  stock  subscribed  for  by  the  incorporators 
as  shown  by  the  certificate  of  incorporation. 

Resolved,  That  the  Secretary  prepare  the  certificate  of  election  of 
directors  and  officers  required  by  the  New  Jersey  statutes,  and  that  the 
proper  officers  of  the  Company  execute  and  file  the  same  in  the  office 
of  the  Secretary  of  State  of  New  Jersey  within  thirty  days  from  date, 
and  that  a  copy  thereof  be  spread  upon  the  Minute  "Book  immediately 
following  the  minutes  of  the  present  meeting. 

The  President  then  brought  to  the  attention  of  the  meeting  (i)  the 
written  proposal  of  Mr.  Richard  White  of  South  Orange,  New  Jersey,  to 
transfer  and  assign  his  Patents  for  Gas  Heating  Apparatus  to  the  Com- 
pany, together  with  an  agreement  to  assign  all  future  inventions  and 
improvements  in  gas  heating  apparatus  made  by  him,  in  exchange  and 
full  payment  for  the  entire  common  stock  of  the  Company,  and  (2)  the 
resolution  of  the  stockholders  approving  said  proposal  and 'instructing  the 
Board  of  Directors  to  accept  the  same. 

Mr.  White's  proposal  was  ordered  received  and  spread  upon  the 
Minute  Book  immediately  following  the  minutes  of  the  present  meeting, 
and  on  motion  duly  made  and  seconded  the  following  resolution  relating 
thereto  was  unanimously  adopted : 

Whereas,  The  property  offered  by  Richard  White  in  exchange  for  the 
entire  common  stock  of  this  Company  is  adjudged  by  this  Board  to  be  of 
the  reasonable  value  of  One  Hundred  Thousand  ($100,000)  Dollars  and 
to  be  necessary  for  the  use  and  lawful  purposes  of  this  Company: 

Now,  Therefore,  Be  it  Resolved,  That  the  said  proposed  assignment 
of  Letters  Patent  and  the  agreement  for  the  assignment  of  future  rights 


372  FORMS    AND    PRECEDENTS. 

and  patents  in  exchange  for  the  entire  common  stock  of  this  Company,  as 
set  forth  in  the  said  proposition  of  Richard  White  as  spread  upon  the 
Minute  Book  of  this  Company,  is  hereby  accepted  and  the  proper  officers 
of  the  Company  are  hereby  authorized  and  instructed  to  receive  the  duly 
executed  assignments  and  agreements  of  said  Richard  White  in  form 
approved  by  Counsel  for  the  Company,  and  to  issue  in  exchange  therefor, 
the  entire  common  stock  of  the  Company  consisting  of  One  Thousand 
(1,000)  Shares  of  the  par  value  of  One  Hundred  ($100)  Dollars  per 
share,  to  such  person  or  persons  as  may  be  designated  by  the  written 
orders  of  the  said  Richard  White,  and  to  do  all  other  things  necessary 
and  convenient  to  consummate  the  said  exchange  and  issue  of  stock  for 
property. 

There  being  no  further  business,  the  meeting  was  adjourned. 

WARREN  CALVERT, 

Secretary. 
GEORGE  P.  GOFF, 

President. 

In  pursuance  of  the  motions  of  the  preceding  minutes,   the   following 
forms  are  hereunto  appended : 

(1)  Call  and  Waiver  of  Notice. 

(2)  Secretary's  Oath  of  Office. 

(3)  Report  to  Secretary  of  State. 

(4)  Forms  of  Stock  Certificates,  Common  and  Preferred. 

(5)  Written   Proposal  of  Richard   While   to   Exchange   Property 

for  the  Common  Stock  of  the  Company. 

WARREN  CALVERT, 

Secretary. 

The  forms  required  by  these  minutes  follow  in  part.  The 
treasurer's  bond  is  omitted  as  being  too  lengthy  for  the  avail- 
able space.  Forms  may  be  obtained  from  any  surety  company. 
The  report  to  the  Secretary  of  State  is  also  omitted  as  being 
local  and  unnecessary.  Blanks  for  this  report  may  be  obtained 
by  application  to  the  Secretary  of  State  at  Trenton,  New  Jer- 
sey. Forms  of  stock  certificates  are  given  in  Chapter  XLVIII, 
"  Stock  Certificates  and  Stock  Books." 

Form  42. — Call  and  Waiver..   Directors'. 


CALL    AND    WAIVER    OF    NOTICE    OF    FIRST    MEETING    OF 

DIRECTORS 

OF 

THE  IMPERIAL  GAS   STOVE  COMPANY. 


We,  the  undersigned,  being  all  of  the  directors  of  The  Imperial  Gas 
Stove  Company,  do  hereby  call  the  first  meeting  of  the  Directors  of 
said  Company  to  be  held  in  the  office  of  Harvey  K.  Wilson,  No.  24 
Morris  Street,  Newark,  N.  J.,  at  J.  P.  M.,  on  the  5th  day  of  February, 
1908,  for  the  purpose  of  electing  officers,  acting  upon  a  proposal  to  assign 
property  to  the  Company  in  exchange  for  stock,  and  for  doing  all  such 
other  things  as  may  be  necessary  or  desirable  in  connection  with  the 


FIRST   MEETINGS.  373 

organization  of  the  Company  or  the  promotion  of  its  business,  and  we 
hereby  waive  all   statutory  or  by-law   requirements  as  to  notice  of  time, 
place  and  objects  of  said  meeting  and  consent  to  the  transaction  thereat 
of  any  and  all  business  pertaining  to  the  affairs  of  the  Company. 
Newark,  New  Jersey,  GEORGE  P.  GOFF, 

February  5th,  1908.  W.   S.   PHILLIPS, 

SIDNEY  F.   HORNER, 
WARREN   CALVERT, 
MARTIN   COLEMAN. 


Form  43.  —  Secretary's  Oath  of  Office. 

SECRETARY'S  OATH. 


STATE  OF  NEW  JERSEY, 
County   of   Essex, 

Warren  Calvert,  the  Secretary  of  the  Imperial  Gas  Stove  Company, 
being  by  me  duly  sworn  upon  his  oath,  does  promise  and  swear  that  he 
will  faithfully  and  impartially  discharge  the  duties  of  Secretary  of  said 
Company  to  the  best  of  his  skill  and  ability. 

WARREN  CALVERT. 

Subscribed  and  sworn  to  before  me 
this  5th  day  of  February,  1908. 

HENRY  H.  FRANK, 

Commissioner  of  Deeds  for 

the  State  of  New  Jersey. 

The  New  Jersey  statutes  require  that  the  Secretary  be 
sworn.  Elsewhere  the  formality  would  seem  to  be  unneces- 
sary. 

Form  44.  —  Proposal  to  Exchange  Property  for  Stock. 

PROPOSAL  TO  EXCHANGE  PROPERTY  FOR  STOCK. 


To  the  Imperial  Gas  Stove  Company, 

No.  24  Morris  Street, 

Newark,  N.  J. : 

GENTLEMEN — I  hereby  offer  in  exchange  and  full  payment  for  the 
Common  Stock  of  your  Company,  amounting  to  One  Thousand  (1,000) 
Shares  of  the  par  value  of  One  Hundred  ($100)  Dollars  per  share,  United 
States  Letters  Patent,  No.  605,948,  issued  to  me  November  6th,  1907, 
for  Improvements  in  Gas  Heating  Apparatus,  said  Patent  to  be  assigned 
to  your  Company  together  with  my  agreement  to  assign  without  further 
consideration  all  other  inventions  and  improvements  in  gas  heating  ap- 
paratus which  I  may  at  any  time  hereafter  own  or  control. 

The  said  One  Thousand  (1,000)  Shares  of  Stock  is  to  be  issued  to  my 
order,  full-paid  and  non-assessable,  against  the  delivery  to  your  Company 
of  due  assignments  of  said  Letters  Patent  and  of  my  duly  executed  agree- 
ment for  the  assignment  of  any  future  inventions  and  improvements  that 
I  may  make  in  gas  heating  apparatus. 

New  York  City,  Yours  truly, 

February  5th,  1908.  RICHARD  WHITE. 


374  FORMS    AND    PRECEDENTS. 

This  proposal  provides  for  the  issue  of  the  entire  common 
stock  in  exchange  for  the  property  mentioned.  Usually  the 
incorporators  subscribe  for  at  least  a  portion  of  the  common 
stock  of  the  company.  On  the  face  of  it,  therefore,  the  pro- 
posal calls  for  the  issue  of  stock  already  under  contract  to 
the  incorporators  and  this  must  be  adjusted  in  some  way  be- 
fore the  proposal  is  accepted.  The  matter  may  be  simply 
arranged  in  either  one  of  two  ways:  By  agreement  with  the 
party  making  the  proposal,  that  his  payment — as  far  as  the 
incorporators'  subscriptions  are  concerned — may  be  regarded 
as  paid  on  their  account,  the  stock  being  issued  to  them.  Or 
the  incorporators  may  assign  their  subscriptions  to  the  party 
making  the  proposal.  If  this  latter  plan  is  adopted,  the  fol- 
lowing form  will  apply: 

Form  45. — Assignment  of  Subscriptions. 

ASSIGNMENT  OF  SUBSCRIPTIONS. 


We,  the  undersigned,  all  the  subscribers  to  the  Common  Stock  of  the 
Imperial  Gas  Stove  Company,  for  and  in  consideration  of  the  sum  of 
One  Dollar  to  each  of  us  in  hand  paid,  and  of  other  good  and  valuable 
considerations,  the  receipt  of  which  is  hereby  acknowledged,  do  hereby 
respectively  sell,  assign  and  make  over  unto  Richard  White  all  our  sub- 
scription rights  to  the  stock  of  said  Company; 

Provided,  however,  that  this  assignment  is  conditioned  upon  the  ac- 
ceptance by  said  Company  of  the  proposal  of  said  Richard  White  of  this 
date  to  purchase  the  entire  Common  Stock  of  said  Company,  and  is  to 
go  into  effect  only  upon  due  tender  by  him  of  payment  for  said  Common 
Stock  in  accordance  with  the  terms  of  the  said  proposal. 

Witness  our  hands  and  seals  this  5th  day  of  February,  1908. 

GEORGE  P.  GOFF, 
W.  S.  PHILLIPS, 
SIDNEY  F.  HORNER, 
WARREN  CALVERT, 
MARTIN  COLEMAN. 


CHAPTER    L. 
OPTION    AGREEMENTS. 


When  a  corporation  is  to  be  formed  for  the  purpose  of 
purchasing  or  taking  over  certain  properties,  option  contracts 
are  usually  employed  to  hold  these  properties  until  the  cor- 
poration can  be  organized  and  act  for  itself.  Such  contracts, 
even  though  made  by  trustees  for  the  corporation,  are  not 
binding  upon  the  corporation  until  accepted  or  ratified  by  its 
formal  action.  In  drawing  such  contracts,  therefore,  care 
should  be  taken  that  the  parties  acting  for  the  corporation 
are  not  unintentionally  bound  or  involved  by  its  terms.  Pay- 
ments made  to  secure  the  option  are  usually  forfeited  in  case 
the  optiori  fails,  but  this  should  mark  the  limit  of  loss  of  the 
party  contracting  for  the  property  unless  otherwise  expressly 
agreed  and  stated  in  the  option  contract.  (See  §§  14-18,  261.) 

Form  46. — Option  on  Capital  Stock. 

OPTION  AGREEMENT. 


An  Agreement  made  and  entered  into  this  i6th  day  of  March,  1908, 
by  and  between  John  H.  Wyckoff  of  Philadelphia,  Pennsylvania,  party  of 
the  first  part,  and  George  Andrew  Dennison  of  New  York  City,  party  of 
the  second  part : 

Whereas,  The  said  John  H.  Wyckoff  owns  or  controls  the  capital  stock 
of  the  Wyckoff  Publishing  Company,  a  corporation  duly  organized  under 
the  laws  of  Delaware  and  carrying  on  its  business  in  the  City  of  Phila- 
delphia, said  business  being  the  publication  of  "  The  Tea  Table,"  a  monthly 
magazine  owned  by  the  said  Wyckoff  Publishing  Company ;  and 

Whereas,  The  said  George  Andrew  Dennison  owns  or  controls  a 
monthly  magazine  known  as  "  The  Daily  Menu "  and  desires  to  pur- 
chase and  combine  therewith  "  The  Tea  Table,"  and  to  form  a  corporation 
to  own  and  publish  the  magazines  so  combined ; 

Now,  Therefore,  In  consideration  of  the  sum  of  Two  Hundred  and 
Fifty  ($250)  Dollars  paid  the  said  Wyckoff  by  the  said  Dennison,  the 
receipt  whereof  is  hereby  acknowledged,  the  said  Wyckoff  for  himself 
and  his  associates  agrees  to  sell  to  said  party  of  the  second  part  or  his 
assigns,  at  any  time  on  or  before  the  ist  day  of  September,  1008,  all  and 
singular  the  entire  right,  title  and  interest  in  and  to  the  said  monthly 

375 


376  FORMS   AND    PRECEDENTS. 

magazine,  including  subscription  lists,  advertising  contracts,  good-will  and 
all  things  incident  to  or  pertaining  to  said  magazine  and  its  publication; 
or  at  the  option  of  said  party  of  the  second  part,  the  entire  capital  stock 
of  the  aforementioned  Wyckoff  Publishing  Company,  consisting  of  Four 
Hundred  (400)  Shares  of  Common  Stock  of  the  par  value  of  Forty 
Thousand  ($40,000)  Dollars ;  the  consideration  for  the  transfer  and  as- 
signment of  said  Magazine,  or  said  capital  stock,  to  b,e  Twenty  Thousand 
($20,000)  Dollars  in  cash  and  one-fourth  of  the  capitalization  of  the  cor- 
poration formed  to  take  over  said  publication. 

This  option  shall  expire  and  be  of  no  further  force  or  effect  after  the 
1st  day  of  September,  1908,  unless  on  or  before  that  date  said  Dennison 
or  his  assigns  shall  deposit  with  the  Guardian  Trust  Company  of  170 
Broadway,  New  York  City,  said  sum  of  Twenty  Thousand  ($20,000) 
Dollars  in  cash,  together  with  certificates  issued  in  the  name  of  John  H. 
Wyckoff,  for  one-fourth  of  the  entire  capital  stock  of  said  new  corpora- 
tion, said  cash  and  stock  to  be  held  in  escrow  by  the  said  Guardian  Trust 
Company  and  to  be  released  and  delivered  to  the  said  Wyckoff  upon  the 
delivery  to  said  Trust  Company  of  a  duly  executed  and  valid  assignment 
of  said  Magazine  to  said  new  corporation,  or  otherwise  of  the  entire 
duly  assigned  stock  of  the  Wyckoff  Publishing  Company,  as  may  be  re- 
quired by  the  written  demand  of  the  said  Dennison  or  his  assigns,  as 
hereinafter  set  forth. 

So  soon  as  said  cash  and  stock  of  the  said  new  company  are  deposited 
in  escrow  as  afore  provided  with  the  Guardian  Trust  Company,  said  Den- 
nison or  his  assigns  shall  give  said  Wyckoff  written  notice  thereof  and 
shall  specify  therein  whether  said  Dennison  desires  the  assignment  of 
said  Magazine,  or  the  stock  of  the  said  Wyckoff  Publishing  Company 
in  exchange  for  the  said  escrowed  cash  and  stock,  and  said  Dennison 
shall  at  the  same  time  file  a  signed  copy  of  said  notice  with  the  Guardian 
Trust  Company. 

It  is  understood  and  agreed  that  should  the  sale  contemplated  by  this 
present  agreement  fail,  neither  party  hereto  shall  be  liable  in  any  way 
under  or  by  reason  of  this  present  agreement,  and  that  should  this  op- 
tion be  assigned  to  any  other  person  or  to  any  corporation,  the  said 
Dennison  shall  be  free  from  all  liability  thereunder. 

In  Witness  Whereof,  The  said  John  H.  Wyckoff  and  the  said 
George  Andrew  Dennison  have  hereunto  affixed  their  re- 
spective signatures  and  seals  the  day  and  year  first  above 
written. 

JOHN  H.  WYCKOFF.  [L.  s.] 

GEORGE    ANDREW    DENNISON.     [L.  s.] 
Attest  signatures : 

MARY  M.  WESTCOTT. 
WILLIS  BENNETT. 

In  this  option  no  provision  is  made  for  any  change  during 
the  option  period  in  the  value  of  the  property  covered.  In 
the  option  which  follows,  such  changes  are  guarded  against 
by  means  of  the  provision  that  the  price  is  to  be  the  ap- 
praised value  at  the  time  of  purchase  plus  a  fixed  amount  for 
good-will. 


OPTION  AGREEMENTS.  377 

Form  47. — Option  on  Business  and  Property. 
OPTION   AGREEMENT 


An  Agreement  entered  into  this  25th  day  of  February,  1908,  by  and 
between  ths  Oswego  Hub  and  Spoke  Company,  a  corporation  duly  or- 
ganized under  the  laws  of  the  State  of  New  York,  party  of  the  first 
part,  and  Willis  P.  Emerson  of  New  York  City,  party  of  the  second 
part. 

For  and  in  consideration  of  the  sum  of  One  Dollar  paid  said  party  of 
the  first  part  by  the  party  of  the  second  part,  receipt  whereof  is  hereby 
acknowledged,  and  for  other  good  and  valuable  considerations,  said  party 
of  the  first  part  does  hereby  agree  to  sell  to  said  party  of  the  second 
part,  as  a  going  concern,  its  entire  business,  factories  and  plant  for  the 
manufacture  and  sale  of  hubs  and  spokes,  owned  and  operated  by  said 
party  of  the  first  part  in  the  City  and  County  of  Oswego,  State  of  New 
York,  including  therewith  all  machinery,  tools  and  other  property  and 
appurtenances  thereunto  belonging,  together  with  all  raw  materials  and 
manufactured  products  on  hand,  and  all  contracts  relating  to  the  pur- 
chase or  sale  of  such  materials  and  products;  also  the  good-will  of  said 
business  and  all  trade-marks,  brands,  patent  riehts.  licenses  and  shop 
rights  used  therein  and  controlled  by  said  party  of  the  first  part ;  ex- 
cepting only  moneys  and  bills  and  accounts  receivable  on  hand  at  the 
time  of  sale;  all  of  said  property  to  be  delivered  free  and  clear  from 
all  liens,  charges,  incumbrances,  taxes  and  assessments,  save  and  ex- 
cept for  a  certain  mortgage  upon  the  real  property  of  the  party  of  the 
first  part,  amounting  to  Thirty  Thousand  ($30,000)  Dollars  and  now 
on  record  in  the  office  of  the  County  Clerk  of  Oswego  County. 

The  price  to  be  paid  for  said  property  shall  be  an  amount  Twenty 
Thousand  ($20,000)  Dollars  in  excess  of  the  actual  appraised  value,  at 
the  time  of  purchase,  of  said  real  and  personal  property,  exclusive  of 
good-will,  as  above  set  forth,  and  such  amount  shall  be  paid  in  cash  at 
the  time  of  transfer,  the  aforementioned  mortgage  being  assumed  by 
the  purchaser  and  accounted  as  a  cash  payment  to  the  amount  of  said 
sum  of  Thirty  Thousand  ($30,000)  Dollars  and  accrued  interest  thereon 
due  at  the  time. 

This  option  shall  expire  and  be  of  no  further  effect  on  and  after  the 
3ist  day  of  October,  1908,  unless  prior  thereto  said  party  of  the  second 
part,  or  his  assigns  shall,  in  writing,  notify  said  party  of  the  first  part 
of  his  or  their  intention  to  exercise  the  same,  and  shall  at  that  time 
deposit  in  the  Oswego  National  Bank,  Ten  Thousand  ($10,000)  Dollars 
in  cash  as  a  guarantee  of  good  faith  and  to  apply  upon  the  purchase 
of  said  property,  and  in  such  event,  the  party  of  the  first  part  shall 
within  sixty  days  of  such  notice  and  deposit,  transfer  and  convey  said 
business  and  property  by  such  deeds,  conveyances  and  assignments  and 
other  instruments  as  may  be  necessary  to  vest  the  full  right,  title  and 
interest  in  said  business  and  property  in  said  party  of  the  second  part 
or  his  assigns. 

It  is  further  understood  and  agreed  that  said  party  of  the  second 
part  assumes  no  responsibility  to  purchase  said  property  unless  he  or 
his  assigns  shall  elect  so  to  do  by  written  notice  and  deposit  in  bank  as 
afore  provided,  and  that  in  case  of  assignment  of  this  present  instru- 
ment by  said  party  of  the  second  part,  all  its  provisions  shall  inure  to 
the  benefit  of,  and  run  in  favor  of,  and  be  binding  upon  his  assignee 
or  assignees  in  every  respect  as  theretofore  upon  said  party  of  the  second 
part,  and  in  case  of  such  assignment  the  said  party  of  the  second  part 
shall  be  free  from  all  liabilitv  hcreunder. 


378  FORMS    AND    PRECEDENTS. 

In  case  of  any  disagreement  as  to  the  terms  of  this  option  or  as  to 
any  matters  connected  with  the  exercise  the^f,  each  party  hereunto  shall 
appoint  an  arbitrator  and  the  two  so  appointed  shall  appoint  a  third 
and  the  three  arbitrators  so  selected  shall  be  empowered  to  finally  decide 
all  matters  of  disagreement. 

In  Witness  Whereof,  the  Oswego  Hub  and  Spoke  Company, 
party  of  the  first  part  has  caused  its  corporate  name  to 
be  hereunto  signed  by  its  President  and  its  duly  attested 
seal  to  be  hereunto  affixed  by  its  Secretary,  and  the  party 
of  the  second  part  has  affixed  his  signature  and  seal,  all 
on  the  day  and  year  first  above  written. 

OSWEGO    HUB   AND    SPOKE    COMPANY, 

By  JAMES  O'REILLY, 
[CORPORATE)  President. 

(         SEAL        i 

Attest  seal: 

HARRIS   N.  SEELEY, 

Secretary. 

WILLIS  P.  EMERSON.     [L.  s.] 
Witness   signature  of  W.    P.   Emerson : 
MARY  N.  BATES, 
CLARENCE  WYMOND, 


Form  48. — Option  on  Real  Estate. 

OPTION  AGREEMENT. 


This  Agreement  made  this  i8th  day  of  March,  1908,  for  the  sale  of 
Real  Estate,  by  and  between  Marcus  M.  McComb,  party  of  the  first 
part,  and  Melville  H.  Winthrop,  party  of  the  second  part,  witnesseth  as 
follows : 

(1)  That  said  party  of  the  first  part  in  consideration  of  Five  Hun- 
dred ($500)  Dollars  to  him  in  hand  paid,  does  hereby  agree  to  grant  and 
convey  to   the   party   of   the    second   part,    his    heirs,   administrators    and 
assigns,  all  that  certain  lot  of  land  together  with  the  buildings,  structures 
and  improvements  thereon,  situated,  bounded   and  described  as   follows: 

(Full  description.) 

(2)  That   said  party   of  the   first  part    hereby   agrees   to    receive   and 
accept   in   full   payment   for   the  said   property,  the   sum   of  Twenty-Five 
Thousand    ($25,000)    Dollars,   payable  Ten   Thousand    ($10,000)    Dollars 
cash    on   delivery   of   deed,    and   the   remainder    in   three    equal   payments 
at  one,  two  and  three  years   respectively,   said  deferred   payments   to  be 
secured   by  mortgage   on   the   said  property   and  to  bear    interest   at   the 
rate  of   Six   (6%)    Per  Cent,  per  annum. 

(3)  That  said  premises  are  to  be  conveyed  subject  to  the  following 
encumbrances : 

(Description  of  encumbrances.) 

(4)  That  said  party  of  the  first  part  agrees  to  convey  said  property 
free   from  all   liens  and   encumbrances,   save   as   above   specified,  by   such 
proper   warranty   deed    containing   full   covenants   duly    executed    and   ac- 
knowledged, as   shall  convey  and  assure  to  the  grantee  the  absolute  fee 
of  said  premises. 


OPTION   AGREEMENTS,  379 

Provided,  However,  That  unless  said  party  of  the  second  part  or  his 
assigns,  tenders  the  said  amount  of  Ten  Thousand  ($10,000)  Dollars 
and  duly  executed  mortgage  for  the  remainder  of  such  purchase  price 
on  or  before  July  ist,  1908,  this  agreement  shall  terminate  and  be  of  no 
force  or  effect  and  the  party  of  the  second  part  shall  forfeit  the  amount 
already  paid  on  this  Option  Contract,  but  no  further  liability  of  any  kind 
shall  be  incurred  by  either  of  the  parties  hereunto. 

Witness  the  hands  and  seals  of  the  said  parties. 

MARCUS  M.  McCoMB.  [L.  s.] 

MELVILLE  H.  WINTHROP.  [L.  s.] 
In  the  presence  of 

SAMUEL  M.  BOSWICK. 

ELLEN  M.  JUDSON. 

(Notarial   acknowledgment   according   to   the   law 
of  the  state  in  which  the  contract  is  executed.) 


Form  49. — Option  on  Corporate  Plant  and  Property. 
OPTION  AGREEMENT. 


This  Agreement  made  this  loth  day  of  March,  1908  by  and  between  the 
Hanley  Drawn  Wire  Company  of  Bethlehem,  Pennsylvania,  party  of  the 
first  part,  and  John  S.  Durand  of  New  York  City,  New  York,  party  of 
the  second  part,  Witnesseth: 

That  for  and  in  consideration  of  the  sum  of  One  Dollar  and  of  other 
good  and  sufficient  considerations  paid  the  oarty  of  the  first  part  by  the 
party  of  the  second  part,  the  receint  whereof  is  hereby  acknowledged, 
the  said  party  of  the  first  part  does  hereby  agree  and  bind  itself  as 
follows : 

First — At  any  time  on  or  before  the  first  day  of  October,  1908,  it 
will  on  demand  of  the  said  party  of  the  second  part,  sell,  convey,  trans- 
fer and  deliver  to  the  said  party  of  the  second  part  or  his  assigns,  on  the 
terms  and  for  the  considerations  hereinafter  set  forth,  all  and  singular, 
the  following  described  property  to  wit : 

All  of  the  real  estate,  buildings,  improvements,  plant,  factory, 
machinery,  tools,  appliances  and  appurtenances  now  belonging  to 
the  said  party  of  the  first  part  and  located  at  Bethlehem  in  the 
County  of  Northampton  and  State  of  Pennsylvania,  including 
therewith  all  property,  machinery,  materials  and  supplies  of  every 
kind  belonging  to  said  party  of  the  first  part  which  may  now  be 
on  said  property  or  employed  in  connection  therewith  or  in  the 
conduct  of  the  business  of  the  party  of  the  first  part. 

Also  all  the  good-will,  trade-rights,  trade-marks,  brands,  patents, 
licenses  and  trade-names  now  owned  or  controlled  by  the  said  party 
of  the  first  part. 

Also  all  manufactured  products,  goods,  crude  materials  and  sup- 
plies of  every  kind  and  wherever  situated  belonging  to  said  party  of 
the  first  part  and  all  its  other  assets  of  every  kind,  save  and  except 
money  on  hand  and  such  bills  and  accounts  receivable  and  other 
liquidated  rights  to  money  as  may  be  due  said  party  of  the  first 
part  at  the  time  the  option  rights  hereunder  are  exercised  by  said 
party  of  the  second  part. 


380  FORMS    AND    PRECEDENTS. 

Second — The  consideration  for  the  transfer  and  assignment  of  said 
property  to  said  party  of  the  second  part  shall  be  Five  Hundred  Thousand 
($500,000)  Dollars,  to  be  paid  in  cash  by  the  party  of  the  second  part  to 
the  party  of  the  first  part  at  the  time  of  the  consummation  of  such 
purchase. 

Third — All  of  the  foregoing  property  is  to  be  transferred  free  and 
clear  from  any  liens,  charges,  incnmbrances,  taxes  and  assessments  of 
every  kind,  and  said  party  of  the  first  part  agrees  at  any  time  during  the 
life  of  this  contract  to  furnish  said  party  of  the  second  part  or  his 
assigns  within  ten  days  of  written  demand  therefor,  full  and  complete  ab- 
stracts of  title  to  all  such  real  estate  as  is  included  under  this  present 
option. 

Fourth— At  any  time  on  or  before  the  first  day  of  October,  1908,  upon 
ten  days'  notice  from  said  party  of  the  second  part  or  his  assigns,  that 
he  or  they  are  ready  to  consummate  the  purchase  herein  contemplated, 
said  party  of  the  first,  part  will  prepare  and  execute  all  such  warranty 
deeds,  transfers,  conveyances  and  agreements  as  may  be  necessary  to  vest 
the  title  of  all  said  property  in  said  party  of  the  second  part  or  his  as- 
signs, and  to  carry  out  the  intent  and  purposes  of  this  agreement,  and  ^yill 
deliver  the  same  against  payment  in  cash  of  the  aforesaid  amount  of  Five 
Hundred  Thousand  ($500,000)  Dollars. 

Fifth — If  before  the  consummation  of  the  purchase  contemplated  by 
this  contract,  any  part  of  the  buildings  or  property  herein  included  be 
destroyed  or  injured  by  fire  or  other  casualty,  or  the  value  thereof  bo 
otherwise  materially  changed,  then  the  true  value  of  said  oroperty  shall 
be  determined  by  appraisement  as  hereinafter  orovided  and  the  purchase 
price  of  said  property  as  fixed  herein  shall  be  so  changed  as  to  accord 
with  the  appraisal  value  of  said  property  so  determined. 

Sixth— The  said  party  of  the  first  part  shall  manage  and  conduct  the 
said  business  for  the  purchaser  or  ourchasers  under  this  contract  for 
any  desired  period  not  exceeding  one  year  after  the  consummation  of  the 
purchase,  the  compensation  of  the  officers  and  employees  of  said  party 
of  the  first  part  during  such  period  to  be  the  same  as  now  paid. 

Seventh — After  the  consummation  of  said  purchase  neither  said  party 
of  the  first  part  nor  its  officers  (who  evidence  their  agreement  thereto 
by  their  signatures  hereunto  affixed)  will  engage  in  the  business  of 
drawing  wire  for  a  term  of  five  years  within  one  hundred  miles  from 
Bethlehem,  Pennsylvania,  unless  in  the  service  of  the  said  party  of 
the  second  part,  his  assigns  or  successors. 

And  it  is  further  agreed  by  and  between  said  party  of  the  first  part 
and  said  party  of  the  second  part  as  one  of  the  conditions  of  this  present 
option  that  on  consummation  of  the  purchase  herein  contemplated  all 
bona  fide  contracts  of  the  party  of  the  first  part  in  connection  with  its 
said  business  in  force  at  the  time  of  said  purchase,  whether  for  the  pur- 
chase of  materials  and  supplies  or  for  the  sale  of  manufactured  products, 
shall  be  taken  over  and  assumed  by  the  said  party  of  the  second  part  or 
his  assigns. 

It  is  also  agreed  that  in  the  event  of  any  difference  between  the  parties 
hereto  concerning  this  contract  or  its  terms  and  conditions,  or  of  the  val- 
uation of  any  property,  or  of  damage  to  anv  property,  each  party  shall 
appoint  some  person  experienced  in  the  said  business  to  act  as  appraiser 
or  arbitrator,  and  the  said  two  appointees  shall  appoint  a  third  nerson  of 
like  qualifications,  and  the  three  arbitrators  so  appointed  shall  without 
unnecessary  delay  decide  such  matters  of  disagreement  or  difference, 
and  the  parties  hereto  agree  and  bind  themselves  to  r.ubmit  and  assent 
to  the  decision  of  the  said  board  of  arbitration  or  appraisement,  and  to 


OPTION   AGREEMENTS.  381 

carry  out  according  to  the  tenor  of  its  decision  the  provisions  of  this 
present  contract. 

It  is  also  agreed  and  understood  by  the  parties  hereto  that  should 
the  purchase  contemplated  by  this  agreement  not  be  consummated  on  or 
before  the  first  day  of  October,  1908,  then  this  oresent  option  indenture 
shall  cease  and  determine  without  prejudice  or  liability  or  claim  of  any 
kind  to  or  against  the  parties  hereunto. 

It  is  further  mutually  understood  and  agreed  that  the  said  party  of 
the  second  part  may  assign  the  present  contract  and  that  his  assignee 
or  assignees  shall  enjoy  the  same  rights  and  privileges  in  this  present 
contract  in  every  respect  as  if  he  or  they  were  original  parties  thereto. 

In  Witness  Whereof,  The  said  Hanley  Drawn  Wire  Company 
has  caused  its  signature  and  seal  to  be  hereunto  affixed 
by  its  duly  authorized  officers,  and  said  party  of  the  sec- 
ond part  and  the  officers  of  said  Hanley  Drawn  Wire 
Company  as  individuals  have  hereunto  affixed  their  re- 
spective signatures  and  seals,  all  on  the  day  and  year  first 
above  mentioned. 

HANLEY  DRAWN  WIRE  COMPANY, 

By  JOHN  G.  WASSINGHAM, 

President. 

j  CORPORATE  } 
\         SEAL         { 

JOHN  S.  DURAND  [L.  s.] 

Attest  seal: 

HOWARD   HANLEY, 
Secretary. 


JOHN   G.   WASSINGHAM    (President) 
WILLIS   H.    MAXWELL    (Vice-President) 
HOWARD   HANLEY    (Secretary) 
HENRY  CLARKSON    (Treasurer) 


L.  s. 
L.  s. 

L.  S. 
L.  S. 


Attest   signatures : 

STANLEY  M.  HARDING. 
GEORGE  H.  GROVER. 


Form  50. — Corporate  Option.     Payment  in  Stock. 


OPTION  AGREEMENT. 

An  Option  Agreement  entered  into  this  i6th  day  of  March,  1908,  by 
and  between  the  Frisbie  Motor  Company,  a  corporation  duly  organized 
under  the  laws  of  New  York  and  having  its  principal  office  in  the  Bor- 
ough of  Brooklyn,  City  of  New  York,  hereinafter  called  the  Vendor;  and 
Joseph  Critchley  and  Martin  W.  Heath  jointly,  their  nominees  or  assigns, 
hereinafter  called  the  Vendees: 

Whereas,  The  said  Vendees  propose  to  form  a  corporation  under  the 
laws  of  the  State  of  New  Jersey  to  be  called  the  Hervey-Mann  Electric 
Company,  hereinafter  designated  the  Company,  for  the  purpose  of  manu- 
facturing, buying  and  selling  electric  apparatus,  machinery  and  materials; 
and 


382  FORMS    AND   PRECEDENTS. 

Whereas,  Said  Vendees  are  desirous  of  securing  for  and  on  behalf 
of  said  corporation  the  right  to  purchase  the  plant  and  property  of  the 
aforesaid  Frisbie  Motor  Company  and  of  securing  similar  rights  to  pur- 
chase other  plants  and  properties  suitable  for  the  purposes  of  the  said 
Hervey-Mann  Electric  Company : 

Now,  Therefore,  In  consideration  of  the  premises  and  of  the  recitals 
of  this  present  agreement,  and  for  the  sum  of  One  Dollar  to  the  said 
Vendor  in  hand  paid  by  the  said  Vendees,  the  receipt  whereof  is  hereby 
acknowledged,  the  said  Vendor  agrees  to  give  and  does  hereby  give  and 
grant  to  the  said  Vendees  the  sole  and  exclusive  right  and  option  until 
the  ist  day  of  July,  1908,  of  purchasing  the  plant  and  property  belonging 
to  the  Vendor  and  situated  at  98-104  Bushvvick  Avenue  in  the  City  of 
New  York,  Borough  of  Brooklyn,  County  of  Kings,  including  the  land, 
buildings  and  improvements,  and  the  machinery,  tools,  supplies  and  equip- 
ment in  or  on  said  buildings  and  land,  together  with  the  good-will,  patents, 
trade-marks  and  all  visible  and  tangible  property,  real  and  personal,  of 
the  said  Vendor  in,  or  on,  or  connected  with  said  plant  and  property  and 
the  business  conducted  therein  or  thereon,  excluding  only  cash  on  hand 
and  in  bank  at  the  time  of  purchase,  and  bills  and  accounts  receivable  for 
work  then  already  done  or  for  supplies  already  furnished,  the  conditions 
of  said  option  being  as  follows: 

First. — The  capital  stock  of  the  said  Hervey-Mann  Electric  Company 
shall  not  be  less  than  Five  Million  ($5,000,000)  Dollars,  divided  into  shares, 
of  the  par  value  of  One  Hundred  ($100)  Dollars  each,  and  of  said  capital 
stock  not  less  than  two-fifths  shall  be  eight  (8%)  per  cent.,  cumulative 
preferred  stock,  preferential  as  to  both  assets  and  dividends,  the  exact 
amount  of  preferred  stock  to  be  determined  by  and  to  be  equal  to  the  in- 
come valuation  of  the  properties  taken  over  by  the  said  Hervey-Mann 
Electric  Company,  said  income  valuation  to  be  determined  as  set  forth  in 
Article  Fourth  of  the  present  agreement,  and  the  remaining  portion  of  the 
said  capital  stock  to  be  common  stock. 

Second.— The  said  Vendees  shall  at  their  own  charge  and  expense  send 
a  duly  qualified  accountant  or  accountants  to  audit  and  examine  the  books 
and  records  of  the  said  Vendor  for  the  five  years  ending  February  ist, 
1908,  and  to  make  such  reports  and  statements  thereof  as  shall  show  the 
present  status  of  the  business,  the  assets  and  liabilities  thereof,  and  the 
net  profits  for  the  period  named  and  for  each  year  thereof,  and  the  aver- 
age annual  profits  for  the  said  period. 

Third. — Said  Vendees  shall  also  at  their  own  charge  and  expense  em- 
ploy a  skilled  appraiser  and  the  Vendor  shall  at  its  own  charge  and  ex- 
pense employ  a  second  skilled  appraiser,  and  the  two  appraisers  shall 
prepare  an  inventory  and  appraisement  of  all  the  property  included  under 
this  option.  In  event  of  their  disagreement,  the  two  said  appraisers  shall 
select  a  third  qualified  appraiser  and  the  decision  of  a  majority  of  the 
three  said  appraisers  shall  be  final,  and  this  appraisal  value  shall  be 
termed  the  "property  valuation." 

Fourth. — A  sum  shall  be  taken  of  which  the  annual  average  net  profits 
for  the  five  years  ending  January  ist,  1908,  of  all  the  properties  to  be  taken 
over  by  the  said  Company  shall  be  eight  (8%)  per  cent.,  and  this  sum 
shall  be  called  the  "  income  valuation  "  of  said  property. 

Fifth. — The  price  payable  in  the  stock  of  the  said  proposed  Company 
for  which  the  Vendor  will  sell  said  property  under  this  option  is  as 
follows : 

Such  amount  of  cumulative,  eight  (8%)  per  cent,  preferred 
stock  of  the  proposed  Company  as  shall  equal  the  "  income  valua- 
tion "  of  said  property,  determined  as  set  forth  in  Article  Fourth  of 
the  present  agreement. 


OPTION   AGREEMENTS.  383 

Such  amount  of  the  common  stock  of  said  Company  as  shall 
equal  the  property  valuation  of  said  property  determined  as  set 
forth  in  Article  Third  of  the  present  agreement. 

Sixth.— The  certificates  for  stock  paid  the  Vendor  hereunder  shall  be 
issued  in  the  name  of  the  Vendor  or  its  order,  and  should  the  amount 
of  either  common  or  preferred  stock  payable  to  the  Vendor  include  the 
fraction  of  a  hundred  dollars,  then  a  full  share  shall  issue  therefor  to 
said  Vendor. 

Seventh. — In  the  event  of  any  material  change  in  the  value  of  the 
assets  or  business  included  under  this  option  after  the  examination  of 
books  and  appraisal  of  property  hereinbefore  provided  for,  whether  by 
act  of  the  Vendor  or  through  fire  or  other  casualty,  the  parties  hereto 
may  agree  upon  a  proportionate  change  in  the  selling  price;  or  if  they 
cannot  agree  thereupon,  or  if  disagreement  or  misunderstanding  shall 
arise  in  any  manner  in  connection  with  this  option  or  its  exercise,  such 
difference  shall  be  determined  and  settled  by  arbitration  in  the  usual 
manner. 

Eighth.— At  any  time  on  or  before  the  1st  day  of  July,  1908,  the  said 
Vendees  may  exercise  the  rights  of  this  present  option  by  giving  written 
notice  to  the  Vendor  of  their  intention  so  to  do,  together  with  a  written 
demand  upon  the  Vendor  for  fulfilment  of  its  terms. 

Ninth. — Within  twenty  days  after  such  written  demand  has  been  made, 
the  said  Vendor  shall  deliver  to  the  Security  Trust  Company  of  New 
York  City  duly  prepared  abstracts  of  title  to  all  of  the  real  estate  of  the 
said  Vendor  included  under  this  option,  showing  the  present  condition  of 
the  title  thereto  and  accompanied  by  full  and  sufficient  deeds  of  general 
warranty,  bills  of  sale,  assignments  and  all  such  other  conveyances  to 
said  Vendees  as  shall  be  usual  or  necessary  for  the  conveyance  and  as- 
surance of  all  of  the  property  and  assets,  real  and  personal,  included  under 
this  present  option. 

Tenth. — Within  thirty  days  after  such  written  demand  and  notice,  the 
Vendees  shall  deliver  or  cause  to  be  delivered  to  the  said  Security  Trust 
Company  in  trust  for  the  said  Vendor,  the  entire  amount  of  common 
and  preferred  stock  of  the  aforementioned  Hervey-Mann  Electric  Com- 
pany required  to  pay  for  the  property  included  under  this  option,  as  set 
forth  in  Article  Fifth  of  the  present  agreement,  whereupon  the  said 
Security  Trust  Company  shall  make  delivery  of  all  deeds,  assignments 
and  conveyances  to  the  said  Vendees. 

Eleventh. — If  the  Vendees  shall  fail  to  pay  over  the  said  consideration 
to  the  said  Security  Trust  Company  within  thirty  days  after  their  written 
demand  and  notice  given  in  compliance  with  the  terms  of  Article  Eighth 
of  the  present  agreement,  this  option  shall  be  abrogated  and  the  said 
Security  Trust  Company  shall  return  to  said  Vendor  all  the  abstracts, 
deeds,  assignments  and  other  instruments  deposited  in  its  custody,  with- 
out lien  or  claim  of  any  kind  upon  the  said  instruments  and  papers  for 
any  charges  and  expenses  connected  with  the  escrow  thereof,  nor  shall 
the  Vendor  be  liable  in  any  way  for  the  services  of  said  Security  Trust 
Company,  the  Vendees  alone  under  any  and  all  circumstances  assuming 
the  sole  liability  for  and  payment  of  all  such  expenses. 

Twelfth. — If  the  Vendees  shall  fail  to  exercise  this  option  within  the 
period  limited,  by  making  written  demand  and  notice  as  specified,  then 
this  option  shall  fail  and  there  shall  be  no  further  privity  of  contract 
nor  responsibility  nor  liability  nor  claim  hereunder  of  any  kind  on  or 
against  either  of  the  parties  hereto  by  reason  of  this  present  agreement. 

Thirteenth. — If  the  sale  herein  contemplated  be  consummated,  the 
Vendees  agree  to  take  over  and  assume  at  the  time  of  such  consummation 


384  FORMS    AND    PRECEDENTS. 

all  bona  fide  contracts  previously  entered  into  by  the  Vendor,  for  the 
purchase  and  sale  of  materials,  raw  or  manufactured,  in  connection  with 
the  property  and  business  included  hereunder. 

Fourteenth. — The  real  and  personal  property,  assets  and  business  of  the 
said  Vendor  shall  at  the  time  of  transfer,  be  free  and  clear  of  all  liens, 
mortgages,  judgments,  debts  and  other  liabilities  whatsoever,  except  en- 
gagements under  current  business  and  contracts  taken  over  by  Vendees,, 
and  such  transfer  shall  be  made  by  warranty  deeds  and  full  guaranty  of 
title  to  all  personal  property,  and  upon  demand  of  the  Vendees,  the  Vendor 
will  execute  or  cause  to  be  executed  all  such  further  instruments,  as- 
signments and  conveyances  as  may  be  necessary  to  properly  effect  such 
transfer. 

Fifteenth. — If  the  sale  herein  contemplated  be  consummated,  then  the 
Vendor  and  all  connected  with  said  Vendor  in  privity  of  interest,  shall 
bind  and  obligate  themselves  by  duly  executed  contracts,  not  to  engage 
in  nor  to  be  or  become  interested  for  a  period  of  ten  years,  either  directly 
or  indirectly,  as  individuals,  partners,  stockholders,  directors,  officers, 
clerks,  agents  or  employees,  in  the  business  of  buying,  manufacturing  or 
selling  electrical  supplies,  material,  machinery  or  any  kindred  products 
or  by-products  of  Vendor's  factory,  within  a  radius  of  five  hundred  miles 
of  the  City  of  New  York,  unless  with  the  written  consent  of  the  Vendees, 
or  in  their  service. 

Sixteenth. — The  Vendees  named,  Joseph  Critchley  and  Martin  W. 
Heath,  or  their  survivors,  shall  act  jointly  in  all  matters  and  contracts 
relating  to  this  option,  and  not  severally,  and  shall  be  trustees  for  the 
purposes  named,  and  upon  assignment  of  this  option  they  shall  be  dis- 
charged from  all  responsibility  and  liability  in  connection  therewith,  and 
such  assignee  or  assignees  shall  be  considered  the  sole  Vendee  party  or 
parties  to  this  option,  with  all  the  rights  and  privileges  thereof  in  all 
respects  as  if  an  original  party  or  parties  thereto. 

In  Witness  Whereof,  The  said  Frisbie  Motor  Company  has 
caused  this  instrument  to  be  signed  and  sealed  by  its 
proper  officers,  duly  authorized  thereto,  and  the  said  Joseph 
Critchley  and  Martin  W.  Heath  have  hereunto  affixed  their 
hands  and  seals  on  the  day  and  year  aforesaid. 

f  CORPORATE  )  FRISBIE  MOTOR  COMPANY, 

(      SEAL      j  By  DANIEL  WINTER, 

President. 
Attest  seal: 


NORMAN  B.  HARTUNG, 

Secretary. 


JOSEPH  CRITCHLEY,        [L.  s.] 
.     [L.  s.] 


MARTIN  W.  HEATH 
Attest  signatures: 

WILFRED  HAYGOOD, 
JOHN  F.  DOWNING. 

In  the  absence  of  any  prohibiting  provisions  or  condi- 
tions an  option  contract  is  assignable  as  is  any  other  form 
of  contract.  A  simple  option  assignment  is  as  follows : 


OPTION  AGREEMENTS.  385 

Form  51. — Assignment  of  Option. 

ASSIGNMENT  OF  OPTION. 


Whereas,  The  undersigned  holds  and  is  the  lawful  owner  of  a  certain 
Option  Contract,  executed  by  the  George  F.  Harper  Company,  of  Phila- 
delphia, Pennsylvania,  the  undertaking  of  which  is  the  sale  of  the  whole- 
sale hardware  business  now  belonging  to  and  conducted  by  the  said  George 
F.  Harper  Company,  at  No.  1725  Chestnut  Street,  in  the  City  of  Phila- 
delphia, said  business  being  more  particularly  specified  and  described  in  the 
said  Option  Contract  hereunto  attached  and  made  part  of  this  assignment: 

Now,  Therefore,  I,  Theodore  Paflin,  in  consideration  of  the  sum  of 
One  Dollar,  the  receipt  whereof  is  hereby  acknowledged,  and  for  other 
valuable  and  sufficient  considerations,  do  by  these  presents  grant,  bargain, 
sell,  transfer  and  assign  unto  the  Allis-White  Hardware  Company,  a 
corporation  duly  organized  under  the  laws  of  the  State  of  New  York,  all 
and  singular,  my  entire  right,  title  and  interest  in  and  to  the  said  Option 
Contract,  to  have  and  hold  the  same  to  the  proper  use  and  benefit  of  the 
said  corporation. 

Witness  my  hand  and  seal  this  I5th  day  of  March,  1908. 

THEODORE  PAFLIN.    [L.  s.] 

Attest : 

IRVIN  M.  ROGERS. 


GENERAL  INDEX. 

[References  are  to  pages.] 


A 

ACKNOWLEDGMENT  of  Charter,  134. 
ADOPTION  OF  BY-LAWS,  143,  144,  193. 
ADVANTAGES  OF  INCORPORATION,  15  to  21. 

AGREEMENTS.     (See  Contracts.) 

between  Incorporators,  30. 
Option,  375  to  385. 

Forms  375  to  385. 
Subscription,  341  to  348. 

Forms  341  to  348. 
Underwriting,  28,  238  to  243,  288. 

AMENDMENT  of  By-laws,  185. 

Charter,  137,  138. 

ANNUAL  MEETING,  151. 
APPLICATION  for  Charter,  99,  100 

ASSIGNMENT  of  Option,  384. 

Forms  385. 
Subscription,  352,  374. 

Forms  352,  353,  374- 
Treasury  Stock,  85  to  87. 
Voting  Trustees'  Certificate,  35810360. 

Forms  359. 

AUDIT,  Annual,  257. 

AUDITOR,  177,  178. 

AUTHORITY.     (See  Power.) 

AVOIDING  FEES  AND  TAXATION,  47  to  51. 

B 
BANK  DEPOSITS,  183. 

387 


338  GENERAL    INDEX. 

[References  are  to   pages.] 

BASIS  OF  CAPITALIZATION,  54  to  56. 

BLANKS,  Subscription,  343. 

Forms  342,  343. 

BOARD  OF  DIRECTORS.     (See  Directors.) 
BOND  ISSUES,  60,  61. 

BOOKS,  Stock  and  Transfer,  149,  360,  361,  365. 
Forms  360,  362. 

BORROWING  MONEY.     (See  Debt.) 
BUSINESS,  Order  of,  156,  165. 

BY-LAWS,  Adoption  of,  143,  144,  193. 
Amendment  of,  185. 
Classification  of,  142,  143. 
Power  to  Make,  123,  128,  141,  142. 
Preparation,  143,  144. 

BY-LAWS,  PART  IV.,*  139  to  186. 

Forms  307  to  330. 
Directors,  157  to  165. 

Classification,  159. 

Compensation,  164. 

Election  of  Officers,  163. 

Meetings,  160,  161. 

Notice  of,  161,  162. 

Number,  157,  158. 

Order  of  Business,  165. 

Powers  of,  159,  164,  165. 

Qualifications,  158,  159. 

Quorum,  162. 

Removal  of  Officers  by,  164. 

Vacancies,  160. 
Dividends  and  Finances,  181  to  183. 

Bank  Deposits,  183. 

Limitations  on  Indebtedness,  182,  183. 

Reserve  Fund,  182. 
Officers,  173  to  180. 

Assistant,  178. 

Auditor,  177,  178. 

Counsel,  177,  178. 

Delegation  of  Powers,  179. 

Managing  Officers,  177. 

Presiding  Officers,  174,  175. 

Qualifications  of,  173,  174. 


*  Ihe  page  references  under  this  head  are  confined  to  Part  IV. 


GENERAL    INDEX. 
[References  are  to  pages . 

Removal  of,  180. 
Secretary,  175,  176. 
Salaries,  179. 
Treasurer,  176. 
Vacancies,  180. 

Standing  Committees,  166  to  172. 
Appointment,  168,  169. 
Composition,  169. 
Powers,  170,  171. 
Procedure,  171,  172. 
Purposes,  166  to  168. 
Stock,  146  to  150. 
Books,  149. 
Certificates,  147,  148. 
Classification,  149. 
Lost  Certificate  of,  150. 
Preferred,  149. 
Transfer  Agent,  148,  149. 
Transfers  of,  148,  149. 
Treasury,  150. 
Stockholders,  151  to  156. 
Certified  List  of,  154. 
Election  of  Directors,  154,  155. 
Meetings,  151. 

Annual,  151. 

Notice  of,  153. 

Officers  of,  152. 

Order  of  Business,  156. 

Proxies,  156. 

Quorum,  155. 

Special,  151,  152. 

Voting,  153,  154. 
Sundry  Provisions,  184,  186. 
Amendments,  185,  186. 
Corporate  Seal,  184. 
Penalties,  184. 

C 

CALL  AND  WAIVER,  Directors'  Meeting,  370. 

Forms  372,  373.- 
Stockholders'  Meeting,  368. 
Forms  367. 

CAPITALIZATION,  54  to  62,  270,  271. 

At  less  than  Real  Values,  56,  57. 
At  Real  Values,  57. 


390  GENERAL    INDEX. 

[References  are  to  pages.] 

Basis  of,  54  to  56. 

Form  of,  60. 

of  Goodwill,  58,  59. 

on  Earning  Capacity,  58. 

CERTIFICATE  OF  INCORPORATION,  PART  III.,  94  to  138. 

Forms  290  to  306. 
Amendment  of,  137,  138. 
Application  for,  99,  100. 
Certified  Copy,  136. 
Classification,  95,  96. 
Execution  of,  133,  134, 
Filing,  134  to  136. 
Parties  to,  101  to  105. 
Purpose  Clauses,  no  to  113. 
Reception  of,  192,  193. 
Special  Provisions  in,  126  to  132. 
Stock  Clauses,  114  to  116. 

CERTIFICATE,  Voting  Trustees',  358,  359. 

Forms  358,  359- 
Assignment  of,  358  to  360. 
Forms  359. 

CERTIFICATES  OF  STOCK,  52,  53,  64,  65,  147  to  150,  199,  200,  354,  356,  358 

to  360,  363. 
Forms  355,  357- 
Adoption  of,  199,  200. 
Assignment  of,  148,  149,  358  to  361. 
.    Full  Paid,  82,  83. 
Lost,  150. 
Transfer  of,  148,  149,  359,  360. 

Forms  360. 
Stub,  354, 

Forms  355,  357- 

CHARTER.     (See  Certificate  of  Incorporation.) 

CLASSIFICATION  of  By-laws,  142. 

Corporations,  95,  96. 

Directors,  123  to  125,  159. 

Stock,  67,  114  to  116,  129,  130,  255,  263,  276,  277. 

COMBINATION.     (See  Industrial.) 
COMMITTEES,  Standing,  125,  166  to  172. 

COMMON  STOCK,  67,  115,  354,  356,  35§  to  361,  363- 
Forms  355. 


GENERAL    INDEX.  891 

[References  are  to  pages.] 

COMPARISON  OF  STATES,  39  to  43. 

COMPENSATION  of  Directors,  164. 
of  Officers,  179. 

CONTRACTS,  ^corporators',  30,  34. 

Option,  32,  285,  375  to  385. 

Forms  375  to  385. 
Prior  to  Incorporation,  29  to  34. 
Promoters',  29,  30,  31,  32,  226  to  237. 

Forms  344,  345- 
Subscription,  23,  24,  26,  341  to  348. 

Forms  341  to  348. 
Trustees',  29,  30,  33,  34,  344- 

Forms  344  to  348. 

CONVERTIBLE  STOCK,  76. 

CORPORATIONS,  Classification  of,  95,  96. 
Domestic,  36,  117. 
Foreign,  36  to  39,  117. 
Financial,  98. 
Holding,  130,  279  to  282. 
Private,  96. 
Public  Utility,  96,  97. 

CORPORATE  Advantages,  15  to  21. 
Name,  106  to  109,  269. 
Purposes,  no  to  113. 
Seal,  184,  356. 
Stock  holding,  130. 

COST  of  Incorporation,  39,  40,  45  to  53. 
Equipment,  52,  53. 

COUNSEL,  51,  52,  177,  178. 

CUMULATIVE  Dividends,  72. 

Voting,  128,  129,  253,  265. 

D 

DEBT,  Limitations  on,  130,  131,  182,  266. 
DEPOSITS,  Bank,  183. 

DIRECTORS,  120  to  125,  157  to  165,  274. 

Classification,  123  to  125,  159. 

Compensation,  164. 

Election  of,  154,  194,  364,  368,  369. 

Meetings,  160  to  165,  196  to  203,  364,  369  to  373- 

Forms  370  to  373. 
Number,  121,  122,  157,  158. 


392  GENERAL    INDEX 

[References  are  to   pages.] 

Power  of,  91,  122,  123,  128,  141, 159,  164. 
Qualifications  of,  120,  121,  157. 
Vacancies,  160. 

DIVIDENDS,  181. 

Cumulative,  72. 

DOMESTIC  CORPORATIONS,  36,  117. 
DOMICILE,  117,  118. 

DUMMY  Directors,  222. 

Incorporators,  104,  105,  222. 

DURATION  OF  CORPORATION,  18,  118,  119. 


ELECTION  of  Directors,  154,  155,  194,  364,  368,  369. 
of  Officers,  163,  198,  199. 

ENDORSEMENT  OF  STOCK  SCRIP,  352. 

Forms  352. 

EXCHANGE  OF  STOCK  FOR  PROPERTY,  194,  201,  204  to  225,  271,  347,  374. 

Forms  373,  374. 

EXECUTIVE  COMMITTEE,  166  to  172. 
EXECUTION  OF  CHARTER,  133  to  136. 
EXPENDITURES,  Limitations  on,  130,  131,  132,  266. 

EXPENSES  of  Incorporation,  45  to  53. 

Table  of,  46. 

F 

FEES  AND  TAXATION,  45  to  53. 

Table  of,  46. 

FILING  CHARTER,  134  to  136. 
FINANCE  COMMITTEE,  166  to  172. 
FINANCIAL  CORPORATIONS,  98. 

FIRST  MEETING  OF  DIRECTORS,  196  to  203,  364,  369  to  373. 

Forms  370  to  373. 

Acceptance  of  Subscriptions,  200,  201. 
Adoption  of  Stock  Certificate,  199,  200. 
Call  and  Waiver,  370. 

Forms  372,  373. 
Election  of  Officers,  198,  199. 
Exchange  of  Stock  for  Property,  201,  202. 
Financial  Provisions,  202,  203. 


GENERAL    INDEX.  398 

[References  are  to  pages.] 

Minutes,  197,  372. 

Forms  370  to  372. 
Opening  Meeting,  198. 

FIRST  MEETING. OF  STOCKHOLDERS,  187  to  195,  364,  365,  367  to  369. 

Forms  365  to  369. 
Adoption  of  By-Laws,  193. 
Call  and  Waiver,  368. 

Forms  367. 

Conduct  of  Meeting,  190,  191,  362,  363. 
Election  of  Directors,  194,  364,  368,  369. 
Exchange   of   Stock   for   Property,   194, 
195,  374- 

Forms   373,   374- 
Inspectors'  Oath  and  Report,  369. 

Forms  368,  369. 
Minutes,  189,  190,  365,  367. 

Forms  365  to  367. 
Opening  Meeting,  191,  192. 
Proxy,  365. 

Forms  368. 

Reception  of  Charter,  192,  193. 
Waiver  of  Notice  of  Assessment,  369. 

Forms  369. 

FOREIGN  CORPORATIONS,  36  to  39,  117. 
FOUNDERS'  SHARES,  77,  78. 

FULL  PAID  STOCK,  79  to  83. 

Certificates  of,  82,  83,  355,  357. 


G 

GENERAL  MANAGER,  177. 

GOODWILL,  58,  59. 

GUARANTEED  STOCK,  73.     (See  Preferred  Stock.) 

H 

HOLDING  CORPORATIONS,  130,  279  to  282. 
Limitations,  281. 
Origin,  279. 

Parent  Companies,  282. 
Present  Status,  280,  281. 
Statutory  Enactments,  279,  280. 


394  GENERAL    INDEX. 

[References  are  to  pages.] 


ILLEGAL  PURPOSES,  112,  113. 

INCORPORATING  A  PARTNERSHIP,  268  to  278. 

Capitalization,  270,  271. 

Classification  of  Stock,  276,  277. 

Directors,  274. 

Exchange  of  Property  for  Stock,  271,  272. 

Name,  269. 

Nature  of  Problem,  268. 

Officers,  278. 

Stock  Adjustments,  272,  273. 

Voting  Requirements,  276. 

Voting  Trust,  275. 

INCORPORATION,  Advantages  of,  15  to  21. 

Certificate  of,  94  to  138.     (See  Certificate  of.) 

Cheap,  39,  40. 

Cost  of,  39,  45  to  53. 

Domestic,  36. 

Foreign,  36  to  39,  117. 

State  of,  35  to  44. 

INCORPORATORS,  101  to  105. 

Agreements,  30,  34. 
Dummy,  104,  105,  222. 
Number,  102. 
Qualifications,  101,  102,  103. 

INDEBTEDNESS,  Limitations  on,  130,  131,  266. 

INDUSTRIAL  COMBINATION,  283  to  288. 

Evolution,  283. 

Inspection  and  Appraisement,  286,  287. 
Option  Agreements,  285,  286. 
Preliminaries,  284,  285. 
Underwriting,  288. 

INSPECTORS'  OATH  AND  REPORT,  369. 

Forms  368,  369- 
INVENTOR.     (See  Protecting  an.) 

ISSUANCE  OF  STOCK  FOR  PROPERTY,  194,  201,  204  to  225,  271,  347,  373,  374. 

Cases  in  Point,  216  to  218. 
Donation  of  Stock  to  Treasury,  225. 
Present  Doctrine,  206  to  216. 
Property  that  may  be  received,  220  to 

222. 

ISSUED  STOCK,  66. 


GENERAL   INDEX.  395 

[References  are  to  pages  ] 


LEDGER,  Stock,  360,  361,  363. 
Forms  362. 

LIABILITIES  of  Directors,  43. 

of  Stockholders,  16,  17,  37,  38,  42,  43,  91. 

LIMITATIONS,  Charter,  122,  130,  131,  132,  258,  266. 
on  Expenditures,  266. 
on  Indebtedness,  130,  131,  182,  266. 
on  Salaries,  131,  132. 

LIMITED  LIABILITY,  16,  17. 

LIST  OF  STOCKHOLDERS,  154. 

LISTS,  Subscription,  341  to  348. 

Forms  341  to  348. 

LOCATION  OF  CORPORATION,  35  to  44,  117,  118. 
LOST  CERTIFICATES,  150. 

M 
MANAGING  OFFICERS,  177. 

MEETINGS,  Directors',  160  to  163.     (See  First  Meeting  of.) 

Stockholders',  151  to  156.     (See  First  Meeting  of.) 
Annual,  151. 

MINORITY,  Protection  of,  43,  249  to  259. 
Rights  of,  249,  250,  252. 

MINUTES,  189,  190,  197,  365,  367,  372. 

Forms  365  to  367,  370  to  372. 
Preparation  of,  189,  190. 

N 

NAME,  Corporate,  106  to  109,  269. 

Change  of,  108,  109. 
How  Secured,  106,  107. 
Right  to,  107,  108. 

NON- VOTING  STOCK,  76,  273. 

NOTICES  of  Directors'  Meetings,  161,  162. 

Waiver  of,  370. 

Forms  372,  373. 
of  Stockholders'  Meetings,  153. 

Waiver  of,  368. 

Forms  367. 

NUMBER  of  Directors,  121,  122,  157,  158. 
of  Incorporators,  102. 


396  GENERAL  INDEX. 

[References  are  to  pages.] 

o 

OATH,  Inspectors',  369. 
Forms  368. 
Secretary's,  373. 

of  Stockholders,  16,  17,  37,  38,  42,  43,  91. 

OBJECTS.     (See  Purposes.) 

OFFICERS,  173  to  180,  278. 

Auditor,  177,  178. 
Counsel,  177,  178. 
Election  of,  163,  198,  199. 
Managing,  177. 
of  Meetings,  152. 
Presiding,  174,  175. 
Qualifications,  173,  174. 
Removal  of,  164,  180. 
Salaries,  179. 
Secretary,  175,  176,  373. 
Treasurer,  176. 
Vacancies,  180. 

OPTION  CONTRACTS,  32  33,  285,  375  to  385. 
Forms  375  to  385. 
Assignment  of  Option,  384. 

Forms  385. 
on  Business  and  Property, 

Forms  377,  378. 
on  Capital  Stock,  376. 

Forms  375,  376. 
on  Corporate  Plant  and  Property, 

Forms  379  to  381. 
on  Real  Estate, 

Forms  378,  379. 
Payment  of  Option  in  Stock, 

Forms  381  to  384. 

ORDER  OF  BUSINESS,  156,  165. 

ORGANIZATION  OF  CORPORATION,  PART  V.,  187  to  237,  364  to  374. 

Forms  365  to  374. 


PARENT  COMPANIES,  282. 
PARTICIPATING  STOCK,  73,  74. 
PARTNERSHIP,  Incorporation  of,  268  to  278. 


GENERAL    INDEX.  397 

[References  are   to  pages.] 

PAYMENT  for  Stock  in  Property,  194,  201,  204  to  225,  271. 
of  Subscriptions,  349,  350,  352. 

Assignment  of,  352, 

Forms  352,  353. 
Receipts  for,  349,  350,  352. 

Forms  349  to  353. 

PLACE  OF  BUSINESS,  117. 

POWERS  of  Directors,  91,  122,  123,  128,  141,  159,  164. 
of  Stockholders,  90,  91. 

PREFERRED  STOCK,  67,  69  to  78,  115,  116,  149. 
as  to  Assets,  72. 
as  to  Dividends,  71,  72. 
Certificates,  356,  358. 

Forms  357- 
Convertible,  76,  77 
Cumulative,  72,  73. 
Founders'  Shares,  77,  78. 
Participating,  73. 
Redemption  of,  74,  75. 
Voting  Rights,  76. 

PRESIDENT,  174,  175. 
PRINCIPAL  OFFICE,  117,  118. 
PRIVATE  CORPORATIONS,  96. 

PROMOTERS,  226  to  237. 

Function,  226. 

Illegal  Arrangements,  227  to  231. 
Incidental  Liabilities,  235,  236. 
Legitimate  Arrangements,  231  to  235. 
Relation  to  Corporation,  227. 
Restrictions  on  the  Sale  of  Stock,  236,  237. 
Subscribers'  Agreement  with,  344,  345. 
Forms  344,  345. 

PROMOTERS'  CONTRACTS,  29,  31,  32. 

PROPERTY  EXCHANGED  FOR  STOCK,  194,  201,  204  to  225,  271,  347,  374. 

Forms  373,  374. 

PROTECTING  AN  INVENTOR,  260  to  267. 

Assignment  of  Patent  to  Trustee,  266. 
Classification  of  Stock,  263,  264. 
Cumulative  Voting,  265. 
Limitation  of  Expenditures,  266. 
Nature  of  Problem,  260  to  261. 
Reservation  of  Royalties,  267. 


398  GENERAL    INDEX. 

[References  are  to   pages.] 

Specified  Majorities,  265. 
Stock  Control,  261  to  263. 
Voting  Trust,  264. 

PROTECTION  OF  MINORITY,  43,  249  to  259. 

Annual  Audits,  257. 
Charter  Limitations,  258,  259. 
Classification  of  Stock,  255. 
Common  Law  Rights,  249,  250. 
Cumulative  Voting,  253  to  255. 
Present  Status,  250  to  252. 
Special  Arrangements,  256,  257. 
Voting  Trusts,  255,  256. 

PROXIES,  156,  365. 

Forms  368. 

PUBLIC  UTILITY  CORPORATIONS,  96,  97. 

PURPOSES,  CORPORATE,  no  to  113. 

Comprehensive,  in,  112. 
Illegal,  112,  113. 
Ultra  Vires,  113. 

Q 

QUALIFICATIONS,  Directors,  120,  121,  157. 

Incorporators,  101,  102,  103. 
Officers,  173,  174. 

QUORUM,  155,  162. 

Directors,  162. 
Stockholders,  155. 

R 

RECEIPTS  for  Stock  Subscriptions,  349  to  353- 

Forms  349  to  353. 
Treasurer's,  349,  350,  352. 

Forms  350,  351. 
Trustee's,  349. 

Forms  349- 

REDEMPTION  OF  PREFERRED  STOCK,  74,  75. 
REMOVAL  OF  OFFICERS,  180. 
RESERVE  FUND,  182. 

RESTRICTIONS  ON  SALE  OF  STOCK,  236,  248. 
RIGHTS  OF  MINORITY,  249,  250,  252. 
RIGHTS  OF  STOCKHOLDERS,  90. 


GENERAL    INDEX.  399 

[References  are  to  pages.] 


SALARIES,  Limitations  on,  131,  132. 

SCRIP,  Stock,  352. 

Forms  351. 

Endorsement,  352. 

Forms  352. 

SEAL,  184,  356. 

SECRETARY,  175,  176. 

Oath  of,  373. 
Forms,  373. 

SHARES  OF  STOCK,  63,  64. 

SPECIAL  PROVISIONS  IN  CHARTER,  126  to  132,  256,  258,  265. 

Classification  of  Stock,  129. 
Corporate  Stockholding,  130. 
Cumulative  Voting,  128,  129. 
Limitations  on  Indebtedness,  130,  131. 
Limitations  on  Salaries,  131,  132. 
Sundry  Provisions,  132. 
Usual  Objects,  127,  128. 

STANDING  COMMITTEES,  125,  166  to  172. 

Appointment,  168,  179. 
Composition,  169,  170. 
Powers,  170,  171. 
Procedure,  171,  172. 
Purpose,  166  to  168. 

STATE  OF  INCORPORATION,  35  to  44. 
STATES,  COMPARISON  OF,  39  to  43. 
STATUS  OF  STOCKHOLDERS,  89  to  93. 

STOCK,  PART  II.,  54  to  88. 

Adjustments,  272,  273. 
Books,  149,  360,  361,  363. 

Forms  360,  362. 
By-laws,  146  to  150. 
Capital,  54  to  61,  62,  63. 

Certificates,  52,  53,  64,  65,  147  to  150,  199,  200,  354,  356, 
358  to  360,  363. 

Forms  355,  357. 
Classification  of,  67,  68,  114  to  116,  129,  130,  255,  263,  276, 

277. 
Common,  67,  115,  354,  356,  358  to  361,  363. 

Forms  355. 


400  GENERAL   INDEX. 

[References  are  to  pages.] 

Convertible,  76. 

Full  Paid,  66,  67,  79  to  83. 

Issuance   for   Property,    194,   201,   204   to   225,  271,   347, 

373,  374- 
Issued,  66. 
Ledger,  360,  361,  363. 

Forms  362. 
Non- Voting,  76,  273. 
Option  on,  376. 

Forms  375,  376. 
Preferred.     (See   Preferred.) 
Restrictions  on  Sale  of,  236,  248. 
Scrip,  352. 

Forms  351,  352. 
Shares  of  63,  64. 

Subscriptions  to.     (See  Subscriptions.) 
System,  18,  19,  62  to  68. 
Transfer  of,  148,  149,  358  to  361. 

Forms  359,  360. 
Treasury,  84  to  88,  150,  225. 
Unissued,  65,  66,  84. 
Watered,  67,  79,  80,  81. 

STOCKHOLDERS,  PART  II.,  89  to  93. 

By-laws,  151  to  156. 
Liabilities  of,  16,  17,  37,  38,  91. 
Meetings  of,  151. 

First,  187  to  195,  364,  365,  367  to  369. 
Forms  365  to  369. 

Quorum,  155. 

Proxies,  156. 

Order  of  Business,  156. 
Powers,  90,  91. 
Relation  to  Directors,  91. 
Rights,  65,  90. 
Status  of,  89  to  93. 

SUBSCRIPTIONS,  23  to  28. 

Acceptance  of,  24,  25,  200,  201. 

Assignment  of,  352,  374. 

Forms  352,  353,  374. 
Blank,  341,  343. 

Forms  342,  343. 
Contract  of,  23,  24,  26. 
Lists,  341  to  348. 

Forms  341  to  348. 
Receipts  for,  349  to  353. 

Forms  349  to  353. 


GENERAL   INDEX.  40 1 

[References  are  to  pages.] 


T 

TAXES,  45  to  47. 

Avoiding,  47  to  51. 
Table  of,  46. 

TRANSFER  Book,  360,  361. 

Forms  360. 
of  Option,  384. 

Forms  385. 
of  Stock,  148,  149,  358  to  361. 

Forms  359,  360. 
of  Subscription,  352,  374. 

Forms  352,  353,  374. 
of  Treasury  Stock,  85  to  87. 
of  Voting  Trustees'  Certificate,  358  to  360. 

Forms  359. 

TREASURER,  176. 

Receipt  of,  349,  350,  352. 
Forms  350,  351. 

TREASURY  STOCK,  84  to  88,  150,  225. 
TRUST,  Voting,  244  to  248,  255,  264,  275. 
TRUSTEES'  Certificate,  358,  359. 

Forms  358,  359- 
Assignment  of,  358  to  360. 

Forms  359. 
Contracts,  29,  30,  33,  34,  344. 

Forms  344  to  348. 
Receipt,  349. 
Forms  349. 

U 

ULTRA  VIRES,  113. 

UNDERWRITING,  28,  238  to  243,  288. 

Forms  331  to  334. 
Advantages,  242,  243. 
Method,  240  to  242. 
Nature  of  Contract,  238  to  240. 

UNISSUED  STOCK,  65,  66,  84. 

V 

VACANCIES,  160,  180. 

VOTING,  153. 

Cumulative,  128,  129,  253,  265. 
Preferred  Stock,  76. 
Proxies,  156. 
Requirements,  276. 


402  GENERAL    INDEX. 

[Refer*nc«s  are  to  pages.] 

VOTING  TRUSTEES'  CERTIFICATE,  358,  359. 

Forms  358,  359. 
Assignment  of,  358  to  360. 
Forms  359. 

VOTING  TRUSTS,  244  to  248,  255,  264,  275. 

Forms  335  to  340. 
Distinctions,  244,  245. 
Formation,  245,  246. 
Legal  Status,  246,  247. 
Nature  of,  244. 
Requisites,  248. 

W 

WAIVER  OF  NOTICE  of  Meetings,  368,  370. 

Forms  367,  372,  373- 
Assessment,  369. 
Forms  369. 

WATERED  STOCK,  67,  79,  80,  81. 
WHERE  TO  INCORPORATE,  35  to  44. 


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